A Siri-ous Buy

01/17/2012 9:30 am EST

Focus: STOCKS

This company has already scored a big hit with cutting-edge voice-recognition programs like the one on Apple’s latest iPhone, but it has an even bigger future ahead of it, writes Matt Delman of Cabot Wealth Advisory.

Today’s stock recommendation comes from Cabot Stock of the Month, where Timothy Lutts scans five Cabot newsletters to select the best stock for the current market conditions. The stock is Nuance Communications (NUAN) and it was originally recommended in Cabot Top Ten Trader. Here’s what he wrote about it in November 2011:

"For as long as there have been machines, people have talked to them. Henry Ford talked to his cars. Charles Lindbergh talked to his airplanes. And you probably talk to your computer, particularly when it doesn’t do what you want it to do.

"Until recently, however, the machines didn’t talk back. But that is changing rapidly, thanks to advances in both computing power and natural language processing. And Nuance is the company at the heart of much of this change, thanks to licensing agreements with developers and vendors in a wide variety of industries.

"Many people know the company from its Dragon NaturallySpeaking products, which you can install on your computer and (when all works properly) talk to, watching as the computer types your words. But the real growth for Nuance is in licensed software, which is embedded in the hidden computers we interact with every day.

"When you call a bank or an airline, you’re almost guaranteed to reach a computer first, and that computer will likely understand you. Your car’s GPS may accept voice inputs as well, and many manufacturers rely on Nuance for the software in these systems. In the medical field, the company already has a major presence, as doctors have long relied on transcriptions services, and the humans in those services are being supplanted by machines.

"For the most part, however, those machines have been limited by their pre-programmed vocabulary and knowledge. But now the world has Siri, the personal assistant included in Apple new iPhone 4S. Siri is the smartest computer you can talk to yet…and it will talk back. And Siri uses Nuance’s voice recognition engine.

"Nuance is also behind the intelligence of Cue, the integrated voice control and entertainment system that will be available in next year’s Cadillacs. Among other things, Cue will read your text messages to you as you drive. And Nuance is working with IBM to provide the speech front-end of a health care-oriented Watson question-answering system.

"In sum, for more than a century we’ve been hunting and pecking. For more than two decades, we’ve been pointing and clicking. Now finally, the machines are beginning to understand our natural mode of communication, speaking.

"Nuance already has great numbers. Revenues have grown every year of the past decade, while earnings have grown every year since 2004. After-tax profit margin is a very healthy 33.8%.

"Last but not least, NUAN has a healthy chart. The long-term trend is up, and while the stock sank below its 200-day moving average in August and September, it has blasted ahead to new highs since.

"The ideal buy would be on a pullback to support at $22, and if you want lower risk, you’re welcome to wait for that. We prefer to simply buy here, trusting that the combined strength of the stock and this revitalized market will push the stock higher."

Just this week Tim wrote: "Nuance Communications, broke out to all-time highs yesterday and continued the trend today. The future for the maker of the Siri voice-recognition software in Apple’s (AAPL) iPhone is very bright. Buy."

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