In 2014 big gainers like Plug Power (PLUG) have drawn considerable investor attention to the tech sector. While the Next Big Thing with absolute surety is impossible, we can isolate a few metrics that tend to bode well for tech plays. Duplicating Plug Power’s 2014 seven-bagger might not be feasible, but finding an overlooked gem and realizing nice gains certainly is not.

METHODOLOGY

To find tech plays we thought had a chance of breaking out, we looked for companies with the following attributes:

Worth between $300 million and $2 billion

We limited our search to tech companies that meet the generally accepted definition of “small-cap.” That is, companies that are small enough to still have room for high-percentage growth, yet large enough to avoid the volatility that is the hallmark of micro penny stocks.

No Dividend Yield

Growing tech businesses shouldn’t be divvying out cash to stockholders. In its early stages of growth, a small-cap tech play should be spending additional cash on R&D.

Net Profit Margin Over 5 Percent

A positive net profit margin indicates the tech play is actually generating earnings.  It also indicates the company has likely stabilized.

Analyst Consensus of Strong Buy

While we trust our own metrics, it does not hurt to have the support of the majority of analysts, in this case generating the highest possible consensus rating.

Gross Margin over 50 Percent

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Margins are extremely important for a technology company, especially the gross margin, because it shows the profit after just the development costs.  If the company isn't making significant money there, the product is likely doomed.   

FINDINGS

After applying our criteria we found five tech plays that possess the fundamentals that tend to correlate with breakout companies. The tech plays we found are:

Bitauto Holdings Limited (BITA)

Market Cap: $1.58 billion

Price: $37.81

P/E: 45.78

2014 YTD Performance: +18.90 percent

Immersion Corporation (IMMR)

Market Cap: $311 million

Price: $10.53

P/E: 76

2014 YTD Performance: +2.5 percent

Lattice Semiconductor Corporation (LSCC)

Market Cap: $901.44 million

Price: $7.68

P/E: 40.42

2014 YTD Performance: +39.89 percent

Nova Measuring Instruments Ltd. (NVMI)

Market Cap: $317.58 million

Price: $11.47

P/E: 32.06

2014 YTD Performance: +17.28 percent

PDF Solutions Inc. (PDFS)

Market Cap: $599.70 million

Price: $19.75

P/E: 29.52

2014 YTD Performance: -22.79 percent

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