4 Emerging Tech Stocks

 |  Includes: CEVA, FN, WEB, ZAGG
by: Stock Traders Daily

One of the most powerful tools any trader or investor can use is to simply review a stock’s relative strength. Relative strength, in its simplest terms, is defined as a measure of a stock’s price trend that indicates how that stock is performing versus other stocks in the same sector. Generally speaking, there is typically a fundamental, underlying reason why a particular stock is outperforming its peers. That fundamental reason may come in many forms -- higher historical growth rates, consistent upside surprises, newly recognized catalysts, superior balance sheets, top-notch management, etc.

In today’s column, we want to identify a few strong relative strength performers from the tech sector that may not be familiar yet to all traders and investors. The beauty of relative strength is, it harkens back to the old traders’ adage, “The Trend Is Your Friend.” Still, given the steep ascension these stocks have made, valuation and technical analysis are key.

WWWW: Strong Growth At A Reasonable Price

One of my favorite small cap tech names at the moment is Web.com Group (Nasdaq: WWWW), which is a provider of website building tools, online marketing services, and lead generation and ecommerce. This was a “left-for-dead” stock not too long ago, trading at just $3.30 last summer. However, the company made a “game-changing” acquisition on June 17, 2010, when it purchased Register.com for $135 million, which has transformed the company. Register.com is the largest privately-owned domain registration and website design company. From a tactical and financial standpoint, the acquisition made good business sense, and thus far, WWWW’s financial results have validated the move. Most recently, the company reported that its fourth quarter EPS jumped 50% year-over-year to $0.24, for an easy $0.07 beat, with revenue soaring 71% to $41.6 million.

There is reason to believe that WWWW isn’t done moving higher too, despite its +260% surge since the beginning of last August. Not only should it continue to benefit from the synergies created by the acquisition that increased its subscriber base by a factor of four, but WWWW is also a play on the burgeoning “local deals” market (think Groupon). While WWWW isn’t a coupon provider, it is benefitting from the fact that small businesses are increasing using websites to advertise deals. We would also point out that WWWW is currently trading with a cheap 1-year forward P/E of 10.3x. That looks especially cheap considering its EPS is expected to expand by 41% in FY11.

The stock is currently trading at an interesting level, just popping to multi-year highs. However, to see if there is any resistance overhead, we urge readers to access our trading report on WWWW.

Proliferation Of Hand-Held Devices Fueling CEVA

Clearly, one of the most powerful trends occurring in the tech sector is the ever-increasing popularity of mobile devices and the ever-expanding number of applications available on them. As a leading licensor of silicon intellectual property, Ceva (Nasdaq: CEVA) is a play on this burgeoning market. Essentially, the company’s technology – which it earns royalty fees on – converts an analog signal into digital form, that then allows for features like voice, audio, and video enhancements on devices such as MP3/4 players, cell phones, digital TVs, and Blu-ray DVDs. Its customer list reads like a “who’s-who” list in the tech space, including names like Broadcom, Motorola, Sony, and Samsung, among others.

Like Web.com, CEVA is coming off a very strong quarter. On Jan. 31, it reported that its fourth quarter EPS grew 73% to $0.19, two cents ahead of estimates, with revenue up 28% to $12.53 million. Its management summed up this quarter this way: “The fourth quarter was the strongest in our history, resulting in record revenues, royalties, operating margins, and earnings.” It is worth noting that its valuation is a bit extended with a forward P/E of 31.x. Easing that concern, though, is the fact that its balance sheet is rife with cash, at $115 million, and no long term debt.

Shares of CEVA have gone “parabolic” on the monthly chart, and are now trading at all-time highs. With that in mind, traders should carefully consider its support levels in order to manage risk.

Recent Optical Components IPO Firing on All Cylinders

Our next stock is another name that may not be on every trader’s lists, but deserves strong consideration. Fabrinet (NYSE: FN), an IPO from June 25, 2010, is up an amazing 187% since going public. The company is a manufacturer of optical components, sensors, and lasers. Its largest, and fastest growing business resides in the communications industry, where it provides carriers with switches, beam splitters, and power monitoring modules. The driver for its growth in this business has a familiar ring to it: Demand for more bandwidth is rapidly increasing due to the proliferation of new, data-rich applications such high-def video and cloud computing. FN’s growth rates have been impressive, as EPS and revenue jumped 42% and 62%, respectively, in the fourth quarter.

Looking ahead, its growth prospects look compelling. Notably, the company is in the process of building a new facility in Thailand – dubbed “Building Six” – that it says will expand its global footprint by 30% and enable it to achieve revenue in excess of $1.1 billion.

Immense Popularity Of iPads and Blackberry’s Boosting Zagg

Zagg Inc’s (Nasdaq: ZAGG) business in easy to understand. The company makes protective clear coverings for hand-held electronic devices under the brand “invisibleSHIELD.” They are designed to protect devices such as the iPhone, iPad, and Blackberry. Admittedly, ZAGG is a bit of a “one-trick pony” at this point, and its results are inherently “lumpy”, generating essentially all of its revenue from these scratch resistant film coverings. But, its growth rates have been undeniably impressive, as its profits soared 300% year-over-year in its third quarter, also highlighted by record operating margin. Given that there is no slow-down in sight for handheld devices, and the company is planning on adding to the list of devices it covers, ZAGG should be well positioned for growth. The stock is currently trading towards the bottom of an upward channel that it has formed.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.