Technology is a fickle industry, and picking the winners and losers can seem like a total crapshoot. But rather than try to predict the hot new trends in tech stocks, a curious investor can shrink the available pool of companies considered "safe" to invest in by applying the following five pieces of criteria:
#1: Doesn't Pay a Dividend
A tech company should be reinvesting profits, not divvying them out to investors. Tech is driven by innovation, and innovation is driven by reinvestment.
# 2 Has a Debt to Equity Ratio That is Less Than .5
Generally long term debt for a technology company isn't a good thing, as an investor should be looking for companies that fund themselves primarily with equity.
#3 Has a Gross Margin Higher Than 50 Percent
Margins are extremely important for a technology company, the gross margin especially because it shows the profit after just the development costs. Tech companies rely on their product, and if the gross margin isn't right, the company is probably doomed.
#4 Has a Profit Margin Higher Than 10 Percent
A tech company that doesn’t have a profit margin higher than ten percent still has a chance of success. But a company that does have a ratio that high (or higher) has likely stabilized, and is thus a safer investment.
#5 Is a Large Cap, or Bigger
Large cap stocks have a market capitalization of $10 billion or more. These companies tend to be more stable than their smaller counterparts.
When we analyzed every American tech stock that currently trades on the market, we found ten tech stocks that can answer "yes" to all five of those questions.They are:
Adobe Systems, Inc. (ADBE)
The San Jose, Ca.-based software developer has grown exponentially since first being founded by Charles Goschke and John Warnock in 1982. The makers of popular product lines Acrobat, Flash, and Photoshop did $4.4 billion in revenue in 2012, and has beat expectations the last two quarters.
Adobe is up 23.36 percent on the year, and is currently priced at $38.34 a share.
Cerner Corporation (CERN)
Cerner isn’t a household name like some of the other companies on the list, but they are one of the biggest. This company helps companies manage their electronic medical records, and claims to be the largest electronic medical record company in the US.
Cerner is up 21.17 percent on the year, and is currently priced at $48.71 a share.
Citrix Systems, Inc. (CTXS)
This software company specializes in cloud computing and desktop visualization. They work closely with Microsoft (MSFT) and in 2008 announced an expanded alliance with the computer company to ensure their products worked in line with one another.
Citirx is up 7.03 percent on the year, and is currently priced at $72.96 a year. They're up over 25 percent since late June.
eBay Inc. (EBAY)
While eBay has certainly lost business to Amazon (AMZN) the internet auction company still has a solid foundation, high name recognition, and a very profitable subsidiary in online payment processing company PayPal.
eBay is down .49 percent on the year, and is currently priced at $53.33 a share.
Google, Inc. (GOOG)
Perhaps the best-known tech company on the planet, Google is the unquestioned leader in internet search, and with a market cap of $296 billion, is one of the largest companies on the planet. And it’s got the fundamentals to boot.
Google is up 23.11 percent on the year, and is currently priced at $890.41 a share.
Red Hat, Inc. (RHT)
This open source software company has been in ppperation since 1993. Headquartered in Raleigh, North Carolina, Red Hat became the first billion dollar open source company in 2012. The company is famous for its adherence to the open-code philosophy, wherein programmers are given free access to modify their products.
Red Hat is down 3.92 percent on the year, and is currently priced at $52.46 a share. They're up 15 percent since early June.
Teradata Corporation (TDC)
The burgeoning Big Data software business drives Teradata, and the company is capitlalizing on the trend. As companies increasingly use firms like Teradata to sift through their mammoth stores of inofrmation (and thus get a better grasp of trend movements) this company can expect continued growth for some time.
Teradata is basically flat on the year, up .08 percent. The stock is currently priced at $63.76 a share.
TripAdvisor Inc. (TRIP)
TripAdvisor is a strange company: spun off of Expedia less than twenty months ago, TripAdvisor has acually grown bigger than its parent. TripAdvisor has shown how online shoppers tend to favor sites that aggregate several companies' offers, thus making travel comparison shopping a one-stop deal.
TripAdvisor has skyrocketed 83.29 percent on the year, and is currently priced at $80.94 a share.
VMWare, Inc. (VMW)
This company specializes in cloud computing, another fast-growing sector of data storage. The compan is based in Palo Alto, and was founded in 1998. It opeartes as separate subsidiary of EMC Corporation.
VMWare is down 10.47 percent on the year, and is currently priced at $84.99 a share. The stock is up nearly 30 percent since late June.
Yahoo! Inc. (YHOO)
Despite the relevance of web portals declining, and Google absolutely dominating search, Yahoo has been nimble enough to not only survive but thrive. Under the leadership of Marissa Mayer, the company has trimmed up, reporting both a fall in revenues and a rise in profits. She also oversaw the $1.1 billion acquisition of blogging platform/social media company Tumblr in May 2013.
Yahoo is is up 37.85 percent on the year, and is currently priced at $27.68 a share.
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