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If you haven't caught the biggest news to spur the market rally to new heights (Nasdaq 3500 is my prediction), then let me fill you in.

You can say all you want that the United States is no longer the powerhouse that drives the world. The common metaphor that is used nowadays is that we are Rome and bound to fall. But the oil rich Arab countries tell the realities; that the world will follow the U.S. in times of crisis. These countries, risking new inflation pressures due to global growth and demand, followed the U.S. Federal Reserve's lead by lowering official interest rates to keep their currencies aligned with the dollar.

Saudi Arabia,the United Arab Emirates, Qatar, Kuwait, and Bahrain followed the Fed's decision to cut interest rates by a quarter percentage point. Because their exchange rates are pegged to the dollar in fixed trading ranges, monetary policy in the Persian Gulf states must mirror U.S. moves to avoid pressures from capital drifting to the currency with the most favorable interest rates. This is despite the rampant inflation in the region. Bankers, according to the WSJ, said the policy conflict is building pressure on the Gulf states to unbind from the dollar. But they can't, and reality is reality. Speculation of depegging is abound, which is why their currency (the dirham) is gaining demand from their investors. The probability sure increased, but the UAE will not do so because we remain on their list of biggest political allies. While it makes sense economically to do so, sometimes money doesn't always rule the minds of those in charge. Policy and political alliances will become tense if this occurs, and they still need the U.S. We aren't dead yet, as they say.

What does this mean? It implies that the flux of money will continue to pour into the U.S. as long as other countries keep their rates with ours. Besides, we still provide the biggest margins and bottom line income for foreign investors.

The outlook

In my opinion, investors in the market should begin purchasing technology companies who are leaders. They will get the early support from the mutual funds and institutions at these levels.

Enter Digi International (DGII).

The Statistics

  • Market Cap = $412.93 Million
  • Shares O/S = 26.3 Million [ a great indicator ]
  • 3-5 year rev. growth = 15-20%
  • 3-5 year eps. growth = 15-20%
  • Cash per share = $3.32 [nice!]
  • Debt/total capital = $0 [excellent, as companies with low debt in this credit crunch will get priority sponsorship]

The company did report its earnings inline, but guidance and expectations better than expected. The company's gross margins stand at 55.4%, and revenue up almost 10% quarter over quarter on a year over year comparisons. The company certainly has done well to position their company in such an environment. But here is the eye grabber--the 10% revenue growth is all organic growth.

Cellular products for DGII also grew 177% year over year, and the embedded product line, which consists of almost 45% of the business grew at an astounding, and sound/stable rate of 20% year over year. Management has done well to keep growth going using capital reserves and not over leveraging themselves here. The best indicator is managing old lines of business. Mature businesses for DGII has been reduced to encompass to only 15% of total sales.

So what is separating DGII already even more? Not their excellent cash flow and debt ratios, but their brand. This company knows how to compete. They currently have OM {Operating Margins} of 17.8%, ahead of the 15.8% in 3Q07 sequentially, and is aiming and on target to accomplish OMs of 25%. This will be achieved through manufacturing efficiencies, and brand leverage. And on a side note, the companies cash per share increased in a business environment where everything is expected to slow to $3.32 from $3.07.

Net income wise, the company's growth since the prior year has been 65.5% after having a tougher time in the prior years. The company certainly has come a long way, and is now posed to reap the benefits of strong management.

The Trade

  • Entry levels: Between $14.50-$20Stop
  • Loss/Downside Risk: $6
  • Upside Potential/Reward: $30 a share

Disclosure: Author has a long position in DGII

Source: Digi International: Great Numbers, Great Brand, Great Management