— “Calling the Trend” Column, by George Leong, B.Comm.
As we move forward, I continue to favor technology as one of the top growth areas in 2010. The NASDAQ is up about 38% this year, and it has been the driver and leader in the broader market. When you buy technology stocks, you buy innovation and advanced technologies. Yes, you could play it safer and buy cyclical stocks, but you will not get the same potential upside you would when buying technology stocks.
The signs for the economy and earnings are encouraging, especially in the technology sector after strong earnings from Oracle Corporation (NASDAQ/ORCL) and Research In Motion Ltd. (NASDAQ/RIMM) last week. RIM is the top player in the PDA sector at this time, as rival Palm, Inc. (NASDAQ/PALM) struggles in comparison. What has helped to drive Research In Motion (RIM) to a strong third quarter and positive guidance is the company is rapidly growing via rapid adaption of its PDA in the non-corporate world, which now accounts for more than its corporate users. RIM is also expanding into China and India. Clearly RIM is the best of breed. Watch for the “iPhone” from Apple going forward, as it is now the main threat to RIM.
Within the technology area, I favor smaller technology companies that have interesting technologies rather than buying established large-caps such as Microsoft Corporation (NASDAQ/MSFT) and Intel Corporation (NASDAQ/INTC). Don’t get me wrong, but companies like MSFT and INTC are the best of breed and you should have a position. But for the real price-appreciation potential, you need to add some small technology companies. In the long-run, small companies tend to outperform, especially at the earlier stages of growth.
For instance, RIM is a great company with excellent potential, but for the stock to double, it will take years. Take a look at China-based Yucheng Technologies Limited (NASDAQ/YTEC), a provider of IT services primarily to the financial services sector in China via a network in 23 cities. This stock has a market-cap of a mere 165 million dollars, but, if all goes as planned, Yucheng could easily outperform RIM. Of course, you take on added risk due to the small size of Yucheng and the fact that it is in China. We like Yucheng Technologies and see longer-term growth opportunities. The company is profitable, has good valuation, and above average growth potential.
Yucheng was recently added to the FinTech 100 survey list for the second straight year. The list ranks the top 100 global application/service providers that derived over a third of company revenues from the financial services area along with multiple technologies. The list is put together by American Banker, Bank Technology News, and IDC Financial Insights.
This is only an example and not a recommendation to buy, but you understand why I like small-cap technology companies. You need to do your research and due diligence. Make sure you are diversified.