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4 tiny tech stocks that may grow into stars Picking small-cap tech companies to invest in isn't easy, but fund manager Kevin Landis says these four offer the right product, right place and right time.  (Fortune) -- Picking small-cap tech companies that will grow into the Apples (Charts) and Googles (Charts) of the future is kind of like looking for potential among a group of teenagers. It isn't easy to tell who's going to make it big. But finding the kids who will grow up to be stars is part of Kevin Landis's job: As chief investment officer of Firsthand, a San Jose, Calif.-based mutual fund company, and manager of its Tech Innovators Fund, he invests in young companies poised to bring "breakthrough" products to market. "One of the ways we bring some value [to shareholders] is company discovery," he explains.
If you're interested in small-cap tech stocks, it's worth getting to know Landis's picks. His Technology Innovators Fund was launched in 1998 and since has returned on average more than 5% annually to investors, beating the averages for both the S&P 500 and the Nasdaq by almost two percentage points. In the past three years, the fund has returned almost 19% annually. His four top picks below are companies that he says fit his investing strategy of right product, right place and right time. Intevac, (IVAC) $17 The fund's largest holding, Intevac (Charts), makes the equipment that hard-disk-drive manufacturers use to create their disks. This equipment, called sputtering technology, applies layers of coating to disks that store information. Until recently, disk manufacturers used horizontal layering of data (think one-story homes), but things started to get crowded. So, Intevac came up with a way for disks to store data vertically (think New York City) in what's called perpendicular recording. This method helps manufacturers keep up with demand for more memory in smaller disks at cheaper prices. Intevac stock is up about 70% in the past year, but is still trading at a very appealing PE of 13 based on 2006 earnings, with $2 of cash per share on the balance sheet and no debt. In the second quarter of this year, sales and earnings doubled. Finisar, (FNSR) $3 Finisar (Charts) sells fiber-optic components that transfer data in networks both long distance and locally, so that video, HDTV, VoIP, and other kinds of data can travel more quickly to another computer or to storage without getting bogged down by data traffic. The stock has been all over the map recently - doubling and then halving in the past six months, and ending up more than 150% overall in the past 12 months. But despite the stock ups and downs, Landis thinks demand for fiber optic products will continue to be strong. And while analysts project Finisar will earn just 15 cents a share for fiscal 2007 (which ends April 2007), Landis says consolidation in the industry should relieve some of the pricing pressure that has held the company back. Emcore, (EMKR) $7 Emcore (Charts) is "a fascinating little company [with] a really interesting collection of possibilities" including its PhotoVoltaics division - which makes solar cells and panels, says Landis. Emcore's focus currently is satellite applications, where the systems produce energy very efficiently, but are also very expensive and are currently only used commercially. Landis sees potential for Emcore in selling smaller land-based systems that are less efficient, but more affordable and thus can be sold to a much wider market. Emcore is also working in partnership with GE Lighting to develop and market LED technology - which is more reliable, longer-lasting and more energy-efficient than traditional light bulbs. The company isn't expected to make a profit until next year, but Emcore stock is up 30% since August 2005. The company's dual-direction strategy of providing energy saving and alternative energy products is a promising one, Landis says. "Every time the price of oil goes up, green investments and alternative energy investments shoot through the roof," says Landis, adding that a company like Emcore has "both ends of that - exposure to LEDs so that people use less power, and exposure to solar, so that people have more power to begin with." PDF Solutions, (PDFS) $11 PDF Solutions (Charts) helps semiconductor companies streamline and improve their manufacturing processes so that production is faster and more accurate, with fewer product defects. To do so, PDF gets to know its customers' business intimately, which can be a selling point for some would-be clients, and a turnoff for others, who may not want to share business secrets with a third party. Nonetheless, Landis sees growing demand for PDF's services. A PE of 22 based on 2006 earnings may seem rich, but it's cheaper than, say, much bigger rival Synopsis, which trades at 24 times fiscal 2006. With uncertainty in the market and the world, investing in small-cap tech can be tricky, but getting in on new trends when the companies are young and growing can be very rewarding. "If a young growth candidate really badly disappoints you, you could lose a more substantial amount of your money there," says Landis. "But when it works well, gosh it really works well." ------------------------------------------ |
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