The Next Stock Market Winners:
Technology’s the Place to Be

Everyone is looking for the next stock market winners, such as Apple Inc. (NASDAQ/AAPL), Incorporated (NASDAQ/PCLN), or Google Inc. (NASDAQ/GOOG).

While gold and gold stocks have provided some of best performing stocks, I continue to feel that technology will be the place to be as an investment opportunity for growth investors going forward.

The third-quarter earnings season is drawing to a close with only 46 S&P 500 companies to report as of November 11. For the third quarter, the blended earnings growth rate was a healthy 17.7%, up from 13.1% as of October 3, according to Thomson Reuters. Of the 454 S&P 500 companies that have reported, 70% exceeded estimates, with 20% falling short. These results are slightly off from the Q3 in 2010, in which 71% of S&P 500 companies beat estimates and 19% fell short. For the fourth quarter, the blended earnings growth rate is expected at around 10.5%.

The reality is that earnings have been made to look better via cost cuts and control. The guidance going forward has been nothing spectacular. Yet, where we are seeing some impressive revenue growth is the technology area, which I feel will be a top investment opportunity going forward.

Technology will see the best chance for investment opportunity. The NASDAQ has been stronger, having broken back above its 200-day moving average (MA) and is positive for the year.

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

The area to watch for the best investment opportunity is the area of mobility applications for tablets and smart phones, as users shift away from the more cumbersome PCs and laptops. Apple is the “best of breed” in my view. A wildcard investment opportunity could be Microsoft Corporation (NASDAQ/MSFT), as it gets set to launch its new smartphones with Nokia Corporation (NYSE/NOK).

Big-name technology continues to look positive, but for higher gains, you need to look in the small-cap area for a really big investment opportunity.

For instance, famed investor George Soros’ Quantum Fund China owns this Chinese information technology (IT) stock as a top five holding to play China’s growth. The stock must be good to satisfy Soros and could make a great investment opportunity.

Beijing, China-based iSoftStone Holdings Limited (NYSE/ISS) provides IT services to clients and globally. Services include consulting & solutions, IT services, and business process outsourcing.

What impresses me about iSoftStone as an investment opportunity is its global reach. Sales at the end of September were China (59.2%), U.S. (24.8%), Europe (7.3%), Japan (8.3%), and other (0.4%).

The client industry breakdown at the end of September was technology (27.7%), communications (40.3%), BFSI (banking, financial services and insurance, 19.4%), Energy, Transport, and public (6.1%), and other (6.5%).

The valuation at 14.27 times its projected 2012 earnings per diluted share is reasonable. .

The five-year estimated annual earnings growth rate is 38%. The price-earnings growth (PEG) ratio of 0.48 is attractive if the company can deliver on its earnings.

iSoftStone is just one example of numerous small-cap tech plays that don’t immediately jump out at you, but that are interesting. Note that we’re not recommending any of the stocks mentioned here as “buys” right now; they’re just examples of what to look for in the promising tech sector.

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

I feel that the market risk is high, as discussed in Stock Market Risk Just Keeps Climbing Higher.

And be careful with Chinese IPOs and stocks; read all about them in Chinese Reverse Merger Stocks Taking More Hits.