Selective Tech Investing the Key to Success

George takes a look at investing in technical stocks, along with the recent earnings news in the sector.Tech heavyweights Oracle Corporation (NASDAQ/ORCL) and Adobe Systems Incorporated (NASDAQ/ADBE) managed to beat on revenues and earnings after the close on Tuesday, but what kind of stood out for me was that the results barely beat the estimates.

Oracle beat slightly on its fiscal Q1 revenues and earnings per share (EPS), but fell a whisker short of the EPS estimate—by $0.03. Revenue growth year-over-year was slight at best and this does not suggest strong demand for technology. We are seeing a potential lag in tech spending, especially with the bigger brand-name tech companies.

And now with the third quarter drawing to an end, investors want to see results for a reason to drive up the stock market. As was the case in the second quarter, there are some high hopes of seeing revenue growth in addition to earnings acceleration as the U.S. economy recovers.

In my view, the key in the third quarter and beyond will continue to be the ability of companies to report higher revenues, which is what you want to see during an economic recovery, as it indicates increased spending.

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The reality is that earnings can be made to look better via cost cuts and control. In addition, watch for guidance going forward, as this will also be a key factor.

The key will be revenues, especially organic growth. We want to see revenues grow to drive earnings instead of cost cuts. Without revenues growing, it is difficult to imagine a healthy, growing economy.

Technology will continue to see the best growth opportunities. The NASDAQ has been stronger, having broken back above its 50-day moving average (MA), but it failed to hold.

I continue to believe that the technology area will be a critical area, since this sector has provided much of the leadership over the last several years.

The area to watch for in technology will be mobility applications for tablets and smartphones, as users shift away from the more cumbersome PCs and laptops. As I’ve mentioned, Apple Inc. (NASDAQ/AAPL) is the “best of breed” in my view. The maker of the “iPhone” and “iPad” traded at a record high of $422.86 on Tuesday.

Big-name technology continues to look positive; but, for higher gains, you need to look in the small-cap area.

For instance, famed investor George Soros’ Quantum Fund China owns this Chinese information technology (IT) stock as a top-five holding. The stock must be good to satisfy Soros.

Beijing, China-based iSoftStone Holdings Limited (NYSE/ISS; Market Cap: $586 million) provides IT services to clients around the world. Services include consulting & solutions, IT services, and business process outsourcing.

What impresses me about iSoftStone is its global reach. Sales at the end of June were to clients in China (56.8%), the U.S. (26.3%), Europe (7.7%), Japan (6.9%), and other (0.3%).

The client industry breakdown at the end of June was: technology (30.4%); communications (39.1%); banking, financial services and insurance (20.7%); energy, transport, and public (4.0%); and other (5.5%).

The valuation at 13.64 times its projected 2012 earnings per diluted share is reasonable.

The five-year estimated annual earnings growth rate is 38%. The price/earnings to growth ratio of 0.50 is attractive if the company can deliver on its earnings.

iSoftStone is just one example of the numerous small-cap tech plays that don’t immediately jump out at you, but is a stock that is interesting.

The key to tech investing is to look away from just brand-name stocks; rather, make sure you are diversified, so as to minimize your total portfolio risk.