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With Goldman's raised price target for Google (GOOG), investors are piling into large cap tech. If related sectors are in for a upward move, the stocks listed below, small caps in good financial shape, represent opportunities for much more upside and limited downside. Money has been chasing the same few names (AAPL, CRM, PALM), which induces massive pullbacks as stocks approach fair value. Research in Motion (RIMM) is the best example of a good tech company that is range bound because, despite fundamental strength, valuing the stock above $80/share is "mathematically curious" and simultaneously invites short-selling and profit-taking. As always, relatively thinly traded, small companies experience greater price volatility than sector stalwarts. For that reason, as well as potentially finding buyout candidates, investors are best served to apply more stringent valuation analysis to cheaper stocks.

  1. BSQUARE Corp (BSQR): BSQR provides training, support, testing and development services in the mobile software space. A recent collaboration with Coca-Cola (KO) seeks development of software for a new vending machine capable of dispensing 100+ different beverages. The Company is valued at $23M, has $11.8M in cash (plus $7.7M in AR, including $4.1M from Ford (F)) and profitably grew revenues in H1 FY2009 to $32.8M.
  2. Spark Networks (LOV): This operator of several online dating sites trades at an all-time low, with a P/S near 0.5 and sub-15 P/E. Free networking sites like Myspace and "anti-capitalist" Craigslist pose major challenges to the future of costly internet dating services, but LOV's specialized services have a solid niche and some segments have shown growth in 2009. Despite declining revenues, first half FY2009 earnings forecasts of 11 cents per share were met and analysts maintain strong ratings on the stock.
  3. TSR Inc (TSRI): This IT staffing firm provides a weak outlook for the future as business with IBM continues to dwindle. The stock still appears to be undervalued, as expenses were reduced sufficiently to maintain profitability in fully reported FY2009. TSRI is debt-free and valued at $8M, has a book value over $12M, cash over $4M and recorded 2009 revenue of $42M.
  4. Sapiens International Corp (SPNS): Yet another IT company, SPNS has inched towards profitability each of the last five years. The Company develops customizable software modules for insurance companies and remains involved with clients through consulting and support services. Costs are down significantly through H1 FY2009, with EPS of 9 cents compared to an 8 cent per share loss in H1 FY2008. With over $10M in cash, this $25M company appears cheap and focused on growing profitability.
  5. Artificial Life (OTC:ALIF): Artificial Life develops mobile web applications for various platforms. Most revenue is generated by the Company's 60+ iPhone games, including collaborations with Red Bull, BMW, platinum recording artists and professional sports teams. Q2 FY2009 was ALIF.OB's second straight quarter of record revenue and 8th consecutive profitable quarter. With a trailing P/E near 4, high profit margins and revenue growth, the share price is likely stagnant due to recent dilution to raise capital for continued growth.

Disclosure: Long ALIF.OB

Source: 5 Profitable Smallcaps That Haven't Participated in the Tech Rally