When looking for growth investment opportunities, technology companies are generally a good place to start. The problem is that not all technology companies are created equal. Investors must be wary of overly exuberant valuations and weak fundamentals. I have chosen five technology companies from different industries to see if any will make good growth additions to our portfolio in the future. Specifically, these names have price to earnings ratios below their industry averages and forward earnings growth above the industry average. Despite these positive metrics, some of these growth names may fall short of expectations. First I analyze the two that fall short, and then I identify the three stocks from which value investors can profit.
STEC, Inc. (STEC)
Second quarter earnings for solid-state drive maker STEC were not pretty this year. The company missed analyst expectations by a penny and offered guidance for the third quarter about $0.20 lower than analysts were expecting. Not surprisingly, the stock was hit hard– falling from $17 to $9.75 in one day. As big a drop as that is, if earnings come in as low as guidance, the stock is still probably overvalued. Currently shares trade for 20.1 times forward earnings and offer no dividend. This is in line with competitors NetApp Inc. (NTAP) and EMC Corp. (EMC), which trade for 20.7 and 20.0 times forward earnings, respectively. However this is much more expensive than the industry leader SanDisk Corp. (SNDK), which trades for 12.1 times forward earnings.
While it would be surprising if earnings for STEC actually come in as low as current guidance, if they do, expect another major decline in STEC’s share price. To continue reading, click here