The autumn of 2014 has been a rough time for the previously bullish tech sector. What was at the beginning of the year the most promising sector in terms of market cap growth has stumbled as of late. While Apple ($AAPL) once again surprised and continued their historic stock run, other lesser-though-still-enigmatic tech stalwarts like Netflix ($NFLX) and Tesla ($TSLA) have fallen from their lofty summer highs and experienced sell-offs. The bigger tech plays have reacted quickly - Marketwatch recently noted that eBay ($EBAY), Hewlett-Packard ($HP), and Symantic ($SYMC) have all begun major slimming-down programs in efforts to remain profitable.
The scrambling form the bigwigs of tech hammered the market in late September, with the tech-heavy NADAQ Composite shedding nearly 10 percent of its value. However, the sector is advancing again – the question is, which tech plays have the fundamentals to capitalize on a potential resurgence of the sector?
To answer this, we analyzed all the tech stocks on the market to find the handful that fit certain criteria:
Analyst Consensus of Strong Buy
While analyst ratings tend to be a little inflated, a consensus of “strong buy” does bolster a company’s perception in the market.
Net Profit Over 5 Percent
We decided to filter out the companies that aren’t yet profitable and instead decided to focus on ones whose product is already growing steady profits. While the tech sector is chock full of companies that never seem to turn a profit yet succeed (cough cough Amazon ($AMZN) cough cough) we elected to err on the side of fundamentals.
Gross Margin Over 50 Percent
A high gross margin implies the tech company is reinvesting their profits wisely. The tech sector is full of people with good ideas who reinvest poorly; we decided to look for those in the opposite camp.
Float Short Under 5 Percent
While a large percentage of investors shorting, or betting against, a company isn’t necessarily indicative of their flawed model, it does imply the stock is overvalued. A very small float short then implies that the stock might be undervalued – or at least the market thinks so.
Growing tech companies shouldn’t pay dividends. Dividends are for companies like Apple that have more money than they know what to do with. Paying a dividend implies a tech company is more interested in rewarding stockholders in the short term rather than growing their product via reinvestment.
Conclusion: Tech Stock With Potential Upside
We found seven stocks that fit the metrics we were looking for, and thus could be considered potentially undervalued at the cusp of a possible tech resurgence. They are:
MiX Telematic Limited ($MIXT)
Vasco Data Security International ($VDSI)
Nova Measuring Instruments ($NVMI)
Lattice Semiconductor ($LSCC)
PDF Solutions Inc. ($PDFS)
GlobalSCAPE Inc. ($GSB)
MAM Software Inc. ($MAMS)
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