Jim Pearce uses a specialized ranking system that isolates the market's more undervalued and overvalued stocks. Here, the editor of Smart Tech Investor, shares some of his current favorite long and short ideas in smartphones, digital media, and the cloud.

Steven Halpern:  Our guest today is Jim Pierce, editor of Smart Tech Investor.  How are you doing today, Jim?

Jim Pearce:  I’m doing great, Steve.  Thanks for having me on the call.

Steven Halpern:  Now, you correctly called for a correction of the stock market over the past few months and, following the recent sharp pullback, you then told investors not to abandon the market and it’s actually suggested that your favorite stocks were offering a window of opportunity.  Could you expand on that?

Jim Pearce:  Sure.  We like correction, Steve, and here’s why.  Most investors are not very discriminating when the stock market is going up and they tend to panic when it starts heading down.  The result is that good and bad companies get punished equally in the short run but the good stocks recover very quickly while the bad ones do not. 

For example, last year we recommended Western Digital (WDC) when it was at $50 and sold it a couple of months ago at $100 but now that it’s dropped down below $90, a result of the recent panic selling, we’ll buy it again if it gets down to $80.

We love being able to lock in a profit of 100% and then buy the same stock back at a 20% discount a few months later, which is something you can only do during a correction.

Steven Halpern:  Now, at the start of the year, when we spoke, you picked Apple (AAPL) as your top investment idea for 2014 and it’s risen over 30% since then.  Could you share an update given that this stock is so popular among our listeners?

Jim Pearce:  Sure.  In short, we still think Apple is the single best tech stock to own for the foreseeable future.  It is so dominating the end user experience, that we’re bullish on Apple on both the short- and the long-term. 

Apple has become the top consumer products company in the world and it’ll be a long time before a competitor is able to invade their product ecosystem.  We think Apple should be a core holding in every tech investor’s portfolio.

Steven Halpern:  Now, perhaps you’d be kind enough to share a new recommendation from Smart Tech Investor for our listeners?

Jim Pearce:  Actually, I’m going to give you two recommendations.  My partner at Smart Tech Investor, Rob DeFrancesco, manages our Next Wave portfolio, which consists of small- and mid-cap stocks that we think have tremendous upside potential from a long-term perspective. 

A broad theme in the Next Wave portfolio is the move to the cloud.  As enterprise software budgets increasingly are moving in towards the cloud environment.  This benefits companies such as Paycom Software (PAYC) and Marketo (MKTO). 

There’s still a lot of Legacy software ripe to be replaced, so this’ll be a long-cycle story.  It’s too early to say which ones will end up dominating the market, so we say buy them both to increase your odds of ending up with at least one of the big winners.

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Steven Halpern:  So, now, an interesting thing about your work is that you’ve been extremely successful both in picking stocks on the long side as well as picking stocks on the down side.

In fact, the last time I interviewed you, you suggested that Netflix (NFLX) at $465 a share was the lowest rated stock in your tech universe and you had picked the stock as your new sure sell recommendation and, since then, it’s fallen more than $100 a share. Could you update listeners on that, on your view of the company?

Jim Pearce:  That recommendation was based on Netflix receiving the lowest Smart Tech rating score for any stock in our covered universe and—believe it or not—even after dropping $100 in value, it is still the lowest scoring tech stock. 

Earlier this year, Leo Boekhl and I estimated a value for Netflix using the most optimistic set of assumptions we could justify and still only came up with a share price of $250, so even though its price has already declined by $100, we think it is still overvalued by another $100.

Steven Halpern:  Now, is there another short idea that stands out in your work?

Jim Pearce:  Well, since Netflix is still our lowest rated stock, we’ll have too look at our second lowest rated scoring stock, which—as of 10/23—is Twitter (TWTR).  At a price of $50, it is trading at more than 500 times forward earnings and pays no dividends. 

That’s not the kind of stock you want to own during a volatile market as one more jolt will send nervous investors scrambling for safety and Twitter is the kind of stock they will abandon as soon as they sense that momentum stocks are going nowhere for a while.

Steven Halpern:  Now, congratulations are also in order.  You’ve just taken over as the Chief Investment Strategist at Personal Finance, which many of our listeners are familiar with.  It’s one of the industry’s longest running newsletters.  Could you tell us a little about this new role and the types of market forecasting you expect to do there?

Jim Pearce:  Sure.  I’d be happy to.  Since I’ve had so much success with the stock rating system that I created for Smart Tech Investor, we are expanding it to cover the entire S&P 500 universe of stocks for the Personal Finance Growth portfolio. 

Our subscribers have been asking us for a tool they can use to evaluate not only the stocks we recommend, but one that will help them manage their entire portfolio.  My job will be to make sure they have the tools that they need to beat the markets and this one will definitely help them do that.

Steven Halpern:  Well, congratulations on the new role and we wish you the best for success and thank you for joining us.

Jim Pearce:  Thank you, Steve.  I really appreciate it.

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