Layoffs, losses, and languishing stock prices. They've all become common in the technology sector as the U.S. economy suffers through its worst financial crisis in decades.
Yet not all tech players have suffered. In fact, some have thrived. This year's ranking of tech's hottest growth companies shows how companies have performed during the latest rough patch relative to their peers. It's a diverse group. While last year's ranking was dominated by chipmakers, this year's list includes computer makers, electronics manufacturers, and two well-known software companies. Google (GOOG) and Apple (AAPL), the hottest of the hot in 2007, still made the cut this year, but they've given up their top spots to two surprising players.
The Hot Growth ranking is based on a number of factors. Sales growth counts the most, though overall sales, return on equity, and return to shareholders are all incorporated too. The financial information is from the most recently available four quarters, as of Oct. 15, and the stock price returns are from the year ended Oct. 15.
Investors should read with particular care: A strong performance today is no guarantee of success in the future. To help gauge the outlook for the top companies in the ranking, we enlisted the help of Morningstar , the investment research firm. The company's analysts shared their opinions on each stock, with an estimate of the stock's fair value and a brief explanation of their thinking. Each stock is also rated on a one-to-five star scale, with five stars being the most promising buys.
1. Gilead Sciences (GILD)
Biotech giant Gilead, maker of 11 commercially available medicines for patients with life-threatening diseases, had a quiet but fruitful year. It has capitalized on the success of its most recently approved drug Atripla, a once-daily tablet for HIV patients, and its 2006 acquisition of pharmaceutical ingredient maker Raylo Chemicals. It's No. 1 on our list, but also one of the biggest gainers in the ranking: Last year, it was ranked 18th.
Morningstar says:
Rating: Three Stars
Current stock price: $43.32
Fair value estimate: $45.00
Analyst comments:
"Gilead Sciences' focus on infectious disease has paid off in spades, and the firm's HIV franchise continues to dominate a growing, global market and drive impressive profitability. Although Gilead has 10 years until key patents begin to expire, management took a big step toward diversification with the $2.5 billion acquisition of Myogen in 2006." (Updated 10/20/08)
2. Western Digital (WDC)
The second-largest hard-drive maker in the world continues to pump out new products. Its most recent arrival is the 300 gigabyte WD VelociRaptor, which the company claims is 35% faster than the previous generation. In September it also unveiled a high-capacity, network storage solution for homes and small offices.
Morningstar says:
Rating: Four Stars
Current stock price: $14.70
Fair value estimate: $25.00
Analyst comments:
"Western Digital's low-cost strategy has helped it succeed in a brutal industry. Strong demand, fueled by the consumer's insatiable appetite for digital content (such as pictures, music, and video), and growing corporate data archive requirements, should continue to drive healthy unit growth into the foreseeable future. Unfortunately, the company might be fighting a losing battle as it more aggressively goes after the industry leader, Seagate." (Updated 7/25/08)
3. Apple (AAPL)
The vaunted maker of Mac computers and iPods continued its hit parade with the launch of the iPhone in 2007 and subsequent AppStore. This year the phone has proved a powerful seller: Apple sold 6.9 million iPhone 3Gs in its third quarter alone, and over 200 million applications have been downloaded from its AppStore. It reported earnings on Oct. 21—too late to be incorporated in this ranking—that blew away analysts' expectations.
Morningstar says:
Rating: Five Stars
Current stock price: $96.38
Fair value estimate: $189.00
Analyst comments:
"We believe that Apple's ability to design easy-to-use gadgets by coupling its software and hardware will enable it to continue to expand across its broad product line of computers, digital media players, and smartphones. Although Apple is less reliant on the Mac business than in past years, this business still has ample growth opportunities. The new 3G iPhone also has enormous headroom for growth and will be available in more than 70 markets before the end of 2008." (Updated 10/21/08)
4. Oracle (ORCL)
Oracle makes enterprise software, and ranks as the third-largest software maker behind Microsoft and IBM. In September, it announced it would sell servers co-branded with Hewlett-Packard (HP). Oracle shot up from 17th place on our list in 2007.
Morningstar says:
Rating: Four Stars
Current stock price: $16.20
Fair value estimate: $24.00
Analyst comments:
"Oracle has astutely leveraged its dominance of the database software industry to become a major provider of enterprise software solutions. We believe that the company has the scale, resources, and expertise to remain at the forefront of the consolidation of the enterprise software industry. We believe that the key to Oracle's competitive advantage rests on its ability to cross and upsell a wide range of enterprise software solutions bundled and well integrated with its pervasive database products." (Updated 9/19/08)
5. Google (GOOG)
The leader and innovator in the booming business of online search, Google used the past year to try to launch its highly-anticipated Android mobile operating system, to monetize big investments like YouTube, and to pursue a major partnership with Yahoo! (YHOO). It did well, but still fell from the top spot on our list.
Morningstar says:
Rating: Four Stars
Current stock price: $339.29
Fair value estimate: $575.00
Analyst comments:
"Google's dominance in Internet search has led to meteoric revenue growth and fantastic profits. This profitability has allowed the company to enter additional advertising markets and new industries, including software as a service and the mobile industry. Though we're not convinced the firm will replicate its current success in these new markets, its profits from search advertising should allow the company to generate significant cash flow for many years." (Updated 10/20/08)
6. Microsoft (MSFT)
The longtime software leader, Microsoft has stayed firmly in the spotlight this year. It launched an energetic, yet ultimately futile attempt to acquire Yahoo, and it rolled out a $300 million ad campaign aimed at taking Apple down a notch. Microsoft moved up on our list, from 11th last year.
Morningstar says:
Rating: Five Stars
Current stock price: $21.96
Fair value estimate: $35.00
Analyst comments:
"Microsoft's traditional software businesses are firing on all cylinders, but the advent of Web-based software will pose a significant challenge for the firm in the decade ahead. Microsoft is acutely aware of the threats and opportunities posed by what Bill Gates has called the 'coming services wave,' and the firm is willing to sacrifice near-term profitability to address it. We think this is absolutely the right decision. The industry is changing, and if Microsoft does not adapt, its competitive advantages will one day disappear." (Updated10/23/08)
7. AT&T (T)
Ranked third on our list last year, AT&T dropped to seventh this year. Lately, it's been capitalizing on its partnership with Apple on the iPhone to add subscribers. The company recently said it has activated 2.4 million units of the latest 3G iPhone. But the success comes at a cost: AT&T subsidizes the cost of the iPhone up front and makes money from subscriber fees paid monthly. On Oct. 22, after this ranking was compiled, AT&T missed Wall Street's earnings estimates because of its iPhone subsidies.
Morningstar says:
Rating: Four Stars
Current stock price: $27.48
Fair value estimate: $35.00
Analyst comments:
"AT&T's scale, customer relationships, and network reach give it a strong competitive advantage; its wireless capabilities in particular set it apart from most rivals. The firm's consumer fixed-line business has been showing signs of weakness recently as consumers shift to other technologies and rival offerings, but it is now a fairly small piece of the total pie. We expect AT&T will have opportunities to expand relationships with customers to keep the top line stable while trimming costs to maintain strong cash flow." (Updated 10/23/08)
8. Flir Systems (FLIR)
Flir makes infrared technology. Its cameras are used by the government for detecting land mines in war zones and stopping illegal border crossings. The technology also has several promising commercial applications, for use in home inspections and in cars to provide dashboard alerts. Last year, Flir ranked 16th on our list.
Morningstar says:
Rating: Not available
Current stock price: $27.48
9. Accenture (ACN)
Accenture combines consulting on management and technology for companies around the world. It recently announced the launch of a new financial tracking system for the U.S. Army. It crept up our list, from No. 27 last year.
Morningstar says:
Rating: Five Stars
Current stock price: $28.87
Fair value estimate: $52.00
Analyst comments:
"Accenture's broad service portfolio, truly global operations, and ongoing buildout in low-cost areas will enable continued strong revenue growth and high profitability for years to come, in our opinion. If all IT services stocks were trading below our Consider Buying price, and we could buy only one, we'd back up the truck for Accenture shares." (Updated 9/26/08)
10. Mantech International (MANT)
Mantech creates technology used by the CIA, the Defense Intelligence Agency, and all branches of the U.S. military. It's also deployed on-the-ground technicians in current conflicts in Kuwait, Afghanistan, and Iraq.
Morningstar says:
Rating: Not available
Current stock price: $42.98
11. Qualcomm (QCOM)
Maker of the chips in phones used by Verizon and Sprint, Qualcomm is finding good growth on the back of its CDMA technology. The company also makes chips for location-based services. It climbed the list of hot growth companies this year, up from 40 last year.
Morningstar says:
Rating: Four Stars
Current stock price: $34.99
Fair value estimate: $48.00
Analyst comments:
"Qualcomm has become the leader in what is known as Code Division Multiple Access (CDMA) technology for cell phones. As the share of next-generation phones continues to favor the CDMA standard and its derivatives, we believe that Qualcomm will emerge as a primary beneficiary. Given an inherent advantage for CDMA to offer a clearer migration path to next-generation services versus competing Global System Mobile (GSM) technology, Qualcomm will stand to benefit on many fronts." (Updated 8/6/08)
12. Cognizant Tech Solutions (CTSH)
Investors are skittish about Cognizant's prospects. The New Jersey company uses its staff in India to provide IT outsourcing services to many companies in the U.S., so it may suffer as the U.S. economy slows. That's one reason its stock dropped 55% during the year ended Oct. 15.
But its financial performance so far has remained quite strong. Revenues are up 40%, and the company remains solidly profitable. Cognizant moved up our list from no. 19 in 2007.
Morningstar says:
Rating: Five Stars
Current stock price: $16.65
Fair value estimate: $30.00
Analyst comments:
"Cognizant Technology Solutions, the youngest of the Tier 1 Indian IT service firms, was fast to get off the blocks and has increased revenue in excess of 50% annually, on average, during the last five years. Cognizant's consistent performance and faster growth is driven by its high-quality consultative approach and deep client partnerships. The company is an active player in a large and rapidly growing IT services market and possesses the highest growth profile among its Tier 1 peers." (Updated 10/9/08)
13. Harris (HRS)
Melbourne (Fla.)-based Harris is a huge producer of tactical radio systems used by the U.S. government. It's also winning a growing number of contracts for the communications systems in emerging markets. It's one of the few companies on this year's list that dropped in ranking, down from the No. 10 spot.
Morningstar says:
Rating: Four Stars
Current stock price: $31.50
Fair value estimate: $56.00
Analyst comments:
"Harris' tactical radios are flying off the shelf. With older radios wearing out at alarming rates and an ongoing transition to a communications-centric fighting force, military demand has grown exponentially. The company is also a major defense contractor providing satellite and communication networks that link sea, airborne, and ground forces. Furthermore, the firm maintains a strong foothold in the commercial sector with products for high-definition broadcasting and microwave/wireless communications." (Updated 10/21/08)
14. SAIC (SAI)
A major contractor for the U.S. Defense Dept., it develops cutting-edge technologies for government intelligence and military communities. In October, it announced that it had been awarded a $254 million contract from the Defense Intelligence Agency, adding to the company's backlog of over $16 billion in contracts for government projects.
Morningstar says:
Rating: Three Stars
Current stock price: $17.97
Fair value estimate: $25.00
Analyst comments:
"By identifying emerging technology priorities and offering cutting-edge solutions, SAIC has become a major defense player with a grasp on the government's wallet. While many of the largest defense contractors depend heavily on huge platform projects, SAIC distinguishes itself through its broad scientific and technological expertise that runs the gamut from future combat systems to integrated port inspection systems to advanced robotics and even biopharmaceuticals." (Updated 10/21/08)
15. Multi-Fineline Electronix (MFLX)
Anaheim-based Multi-Fineline produces flexible circuit boards for mobile phones, medical devices, and other portable electronics. This is the first year it has made our list of hot growth companies.
Morningstar says:
Rating: Three Stars
Current stock price: $9.46
Fair value estimate: $13.00
Analyst comments:
"M-Flex's days as a captive supplier to Motorola (MOT) may be over, but we expect this component supplier to remain exposed to a highly concentrated customer base, leaving it with little pricing power. Despite its efforts to diversify, we think the company has limited ability to grow profits and create long-term shareholder value." (Updated 8/6/08)
16. IBM (IBM)
Big Blue fell behind HP as the computer maker with the most revenue in 2006, but IBM continues to be the most profitable. It's also one of the largest software companies in the world, a strong provider of business services, and recipient of the most U.S. patents for 15 straight years.
Morningstar says:
Rating: Five Stars
Current stock price: $82.07
Fair value estimate: $136.00
Analyst comments:
"IBM's ability to globally deliver best-of-breed solutions across hardware, software, and services for clients is the key to its competitive advantage. IBM is unrivaled in the breadth and depth of products and services that it can offer to its clients based on their business requirements." (Updated 10/16/08)
17. NII Holdings (NIHD)
NII Holdings focuses on corporate customers in the fast-growing market for wireless telecom in Latin American countries. It sells products under the Nextel brand name in countries like Argentina, Mexico, Chile, and Brazil.
Morningstar says:
Rating: Five Stars
Current stock price: $15.41
Fair value estimate: $58.00
Analyst comments:
"NII Holdings has a strong position as a niche wireless provider serving the Latin American business market. Improving economic conditions in the region have helped the firm generate strong profitability and returns on investment. However, NII competes with telecom giants that dwarf its size and resources." (Updated 10/23/08)
18. Corning (GLW)
Corning is the leading producer of LCD displays for computer monitors and televisions, with 60% market share. In 2007, it ranked 57th on our list of Hot Tech Growth companies.
Morningstar says:
Rating: Four Stars
Current stock price: $10.65
Fair value estimate: $18.00
Analyst comments:
"Since its near-bankruptcy days during the burst of the technology bubble, Corning has reinvented itself as one of the most sophisticated manufacturers of glass and ceramic substrates globally. We think the company's technology know-how gives it a leg up against competitors, but the unattractive characteristics of cyclical markets remain concerning." (Updated 10/16/08)
19. Dolby Laboratories (DLB)
Dolby is well-known for its movie surround-sound, and makes equipment used by musicians and filmmakers. Recently, it has pursued a diverse base of revenue streams, such as digital cinema systems, in-car entertainment systems, and high-definition DVD players.
Morningstar says:
Rating: Three Stars
Current stock price: $30.67
Fair value estimate: $33.00
Analyst comments:
"Dolby's brand name, customer relationships, and patents are the cornerstone of its economic moat. However, a sharp slowdown in Dolby's most important consumer market and increased competition might undermine the company's historical stronghold on this audio segment. Dolby is betting on a big consumer upgrade to a new generation of high-definition DVD players, but as with any technological change, it is easy for competitors to sneak in the door." (Updated 8/4/08)
20. Amphenol (APH)
Amphenol makes fiber optic, cable, and other connectors for a range of electronics. It's announced two big acquisitions since 2005: Teradyne Connection Systems and SV Microwave. It jumped up our list from last year, when it was ranked 36th.
Morningstar says:
Rating: Five Stars
Current stock price: $24.30
Fair value estimate: $46.00
Analyst comments:
"Acquisitions and innovative products will enable Amphenol to grow faster than the industry, in our opinion. We believe the company will continue to make strategic acquisitions to build upon its competitive advantages and maintain its impressive profit growth and returns on invested capital." (Updated 10/16/08)
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