Tech Stocks on Speed Dial

07/06/2009 1:52 pm EST

Focus: STOCKS

James Oberweis

President, Oberweis Asset Management, Inc.

Jim Oberweis and Ken Farsalas of The Oberweis Report expect 'killer apps' to drive these growth leaders higher.

Halfway into this year, technology stocks are the best performing [sector] in the Russell 2000 Growth Index, the first time they’ve been top dogs in more than five years.

After years of lagging performance, we believe recent relative strength signals the start of a longer-term trend and is not merely a flash in the pan. Our confidence stems from the emergence of the next "killer apps," which drive technology cycles because they change how we live our lives. During the 1980s and early 1990s, the personal computer was the killer app. During the late 1990s, it was the Internet. During this decade—zilch.

Until now. The next killer apps—video-on-demand and ubiquitous high-speed wireless connectivity—are coming. During the next 10 years, video-on-demand will change how we watch TV and see movies.

Soon enough, you will be able to watch what you want, when you want. Say adios to the traditional TV networks, and maybe even to your cable TV provider.

And “smart phones” cruising high-speed wireless networks will morph from boring and blasé cell phones into robust, multi-functional devices. Apple’s iPhone, after all, is really a mini-computer that just happens to have phone capabilities. Frankly, the product’s name doesn’t do it justice. Just as Apple’s unique graphical user interface in the original Macintosh accelerated the proliferation of computers, their revolutionary iPhone marks the start of the real smart phone revolution.

Some ways to play a stronger technology market:

Synaptics (Nasdaq: SYNA) makes touchpads and touchscreens for PC’s and smart phones that allow users to control their devices. Although Synaptics’ touch screens are not used by Apple (Nasdaq: AAPL), the company has secured design wins for competing smart phones from Research in Motion (Nasdaq: RIMM), Nokia (NYSE: NOK), and LG. The company grew revenues 28% year-over-year last quarter and had 42% gross margins.

Starent Networks (Nasdaq: STAR) manufactures wireless infrastructure equipment used by cell phone providers to deliver high-speed functionality to their customers. Starent’s equipment is the backbone that helps wireless networks operate at broadband speeds. The company grew revenues 30% year-over-year last quarter and had 80% gross margins.

Netlogic Microsystems (NETL) designs “knowledge-based” processors that allow network providers to prioritize network traffic, slowing down low-priority traffic like emails and accelerating delivery of high-priority traffic like streaming video. Network optimization helps make video-on-demand a reality. The company saw revenues contract last quarter because of the slumping economy but had 69% gross margins. Revenue growth should re-accelerate in the coming quarters.

As the market emerges from the bear market—which was driven by a commodities and housing bubble—expect market leadership to rotate. We believe technology stocks could be poised to once again lead the way.

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