Two Ways to Play Tech's Rebound

02/11/2010 1:00 pm EST

Focus: MARKETS

James Oberweis

President, Oberweis Asset Management, Inc.

Jim Oberweis, editor of The Oberweis Report, says technology is making a comeback, and he likes two small-cap companies in growing niche markets.

Technology’s lost decade is over.

According to Gartner Group, global semiconductor industry capital spending declined 32% in 2008 to $31 billion and further declined an estimated 43% in 2009. Capital investments can be put off for a period of time, but eventually companies have to keep up.

We expect that 2010 will be better for tech stocks. Even after a strong year in 2009, they still have a long way to go to compensate for the carnage of 2008. In particular, bet on companies building the latest-generation semiconductors or facilitating greater network bandwidth.

Indeed, Gartner Group predicts better days ahead for semiconductor equipment companies, and estimates capital spending will expand 45% over the trough levels of 2009.

Cirrus Logic (Nasdaq: CRUS) develops high-precision analog and mixed-signal integrated circuits for a broad range of audio and energy markets. The company delivers highly optimized products for consumer and commercial audio, automotive entertainment, and targeted industrial and energy-related applications.

Cirrus has more than 1,000 patents protecting countless products that include digital-to-analog converters, codecs, interface products, volume control ICs, and digital amplifiers.

The company’s products can be found in MP3 players, smart phones, satellite radios, digital utility meters, and seismic sensors. During the nine-month period ended December 26, 2009, audio products represented 72% of revenue while energy products represented 28%.

The company has one end customer (believed to be Apple) that purchased, through multiple contract manufacturers, approximately 40% of the company’s sales for the three-month period ended December 26, 2009.

In the company’s latest reported third quarter, sales increased approximately 49% to $65.2 million. Cirrus Logic reported non-GAAP earnings of 19 cents per share in the latest reported third quarter versus seven cents in the same quarter of last year. (It closed above $6.50 Wednesday—Editor.)

DragonWave (Nasdaq: DRWI) specializes in using wireless technology to expand so-called “backhaul” capacity. Explosive demand for data and video on smart phones is creating a bottleneck for backhaul, which refers to the connection between cellular towers and a carrier’s core fiber network. In the US, towers are usually connected to core networks via copper wires. In Europe and Asia, wireless microwave technology dominates.

Since copper wires don’t scale well as bandwidth needs increase; wireless backhaul should fill the void. Major customer Clearwire, a new carrier, is building out the first nationwide super-fast 4G WiMax network that almost exclusively uses wireless backhaul and primarily relies on DragonWave.

In the company’s latest reported third quarter, sales increased approximately 421% from the third quarter of last year, to $55.8 million. DragonWave reported earnings of 37 cents per share in the latest reported third quarter versus a loss in the same quarter of last year. (It closed above $12 Wednesday—Editor.)

Disclosure: Clients of Oberweis Asset Management own shares of both stocks.

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