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The Technology sector has been a laggard this year, the total return, year to date (11/21/2012) was only 6.4%, while the appreciation of the Russell 3000 index in the same period was 10.7%. Nevertheless, it is possible to find promising candidates among the stocks in this sector.

Stock Sectors' Total Returns, Year to Date, are shown in the chart below:

(click to enlarge)

Source: finviz.com

It is possible to judge whether a stock is trending up or down by comparing its current share price to its moving average. Stocks trading above their moving averages are considered to be in an uptrend, and those trading below their moving averages are considered to be in a downtrend. The distance that a stock is trading above or below its moving average reflects the trend strength. The 200-day moving average is used for measuring long-term trends, the 50-day moving average is used for measuring mid-term trends, and the 20-day moving average is used for measuring short-term trends.

I have searched for very profitable stocks with strong growth prospects. I also looked for companies which are in short-term uptrend, in mid-term uptrend and in long-term uptrend. Stocks in an uptrend are performing well and are in a buying mode.

I have elaborated a screening method which shows stock candidates following these lines. Nonetheless, the screening method should only serve as a basis for further research.

The screen's formula requires all stocks to comply with all following demands:

1. The stock is included in the Russell 3000 index. Russell Investment explanation:

The Russell 3000 Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market. The Russell 3000 Index is constructed to provide a comprehensive, unbiased, and stable barometer of the broad market and is completely reconstituted annually to ensure new and growing equities are reflected.

2. Earnings growth estimates for the next 5 years (per annum) is greater than 17%.

3. Price to free cash flow is less than 15, (many investors prefer using free cash flow instead of net income to measure a company's financial performance, because free cash flow is more difficult to manipulate. Free cash flow is the operating cash flow minus capital expenditure).

4. The PEG ratio is less than 1.00.

5. Stock price is above 20-day simple moving average (short-term uptrend).

6. Stock price is above 50-day simple moving average (mid-term uptrend).

7. Stock price is above 200-day simple moving average (long-term uptrend).

After running this screen on November 22, 2012, I obtained as results the 3 following stocks:

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Cadence Design Systems Inc. (NASDAQ:CDNS)

Cadence Design Systems, Inc. develops, sells or leases, licenses, and maintains electronic design automation software, hardware, verification intellectual property, and design IP for semiconductor and electronic system customers worldwide.

Cadence Design Systems has a low forward P/E of 14.18 and the PEG ratio is very low at 0.95. The price to free cash flow for the trailing 12 months is quite low at 14.89 and the average annual earnings growth estimates for the next 5 years is very high at 17.50%. The stock price is 1.88% above its 20-day simple moving average, 0.25% above its 50-day simple moving average and 8.26% above its 200-day simple moving average.

Analysts recommend the stock-- among the eight analysts covering the stock, four rate it as a strong buy, three rate it as a buy and only one rates it as a hold. On October 24, the company reported its 3Q financial results. Revenue and earnings per share topped analysts' estimates, and the projected revenue this quarter is higher than consensus. In my opinion, the CDNS stock is a promising investment candidate.

(click to enlarge)

Chart: finviz.com

Cray Inc. (NASDAQ:CRAY)

Cray Inc., together with its subsidiaries, designs, develops, manufactures, markets, and services high-performance computing systems, known as supercomputers.

Cray Inc. has no debt at all and it has a very low trailing P/E of 2.85 and the PEG ratio is very low at 0.14. The price to free cash flow for the trailing 12 months is very low at 12.02 and the average annual earnings growth estimates for the next 5 years is very high at 20%. The stock price is 7.56% above its 20-day simple moving average, 7.80% above its 50-day simple moving average and 27.41% above its 200-day simple moving average.

On November 09, Cray reported its 3Q financial results (here). Cray beat expectations on revenue and on EPS. Compared with the prior year quarter, revenue dropped slightly and GAAP loss per share dropped, margins expanded across the board. Revenue for the quarter fell 3% to $35.7 million from $36.7 million in the same quarter last year and the company had a net loss of 14 cents per share, that compares with a loss of 35 cents per share in the same quarter last year. Analysts polled by FactSet were expecting the company to post a loss of 50 cents per share on revenue of $30 million. All these factors make the stock quite attractive.

(click to enlarge)

Chart: finviz.com

InterDigital, Inc. (NASDAQ:IDCC)

InterDigital, Inc. engages in the design and development of technologies that enable and enhance wireless communications. The company has a low debt (total debt to equity is only 0.35) and it has a very low at trailing P/E of 6.28 and a very low PEG ratio of 0.36. The price to free cash flow for the trailing 12 months is very low at 6.71 and the current ratio is very high at 3.15. The average annual earnings growth for the past five years has been very high at 40.71% and the average annual earnings growth estimate for the next five years is also high at 17.5%.

The stock price is 4.45% above its 20-day simple moving average, 10.80% above its 50-day simple moving average and 25.83% above its 200-day simple moving average. On October 24, the company reported its 3Q financial results (here). The company met expectations on revenues and beat slightly on EPS. Compared to the prior year quarter, revenue and EPS grew significantly, margins increased across the board. InterDigital booked revenue of $434.0 million, much higher than the prior year quarter's $76.5 million, and had earnings per share of $5.56 much higher than the prior year quarter's $0.57 per share. Analysts were expecting revenue of $435.3 and EPS of $5.44. The very low multiples make the IDCC stock quite attractive.

(click to enlarge)

Chart: finviz.com

Source: 3 Tech Growth Stocks In Uptrend With Low PEG