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    The First Cut: Hot Technology Stocks

    by John Bajkowski

    The First Cut: Hot Technology Stocks Splash image

    In a role reversal, technology stocks have provided steady and consistent gains during 2007, while the broad market has experienced wild swings digesting issues such as subprime lending and increasing oil prices.

    This issue’s First Cut highlights technology stocks with strong price momentum and improving analyst expectations. The screen is simple, starting with the technology sector, which currently makes up 20% of the overall stock market. Investors have favored larger companies during 2007, so the First Cut screen excludes stocks with a market capitalization below $2 billion, and companies that are not exchange-listed.

    When focusing on a hot industry, it is important to pay attention to consensus earnings estimates and their revisions, since any change in the market’s perception of a company and its industry has a strong impact on its price. All stocks passing the First Cut have positive historical earnings per share over the trailing four quarters and have had an upward revision of their consensus mean estimates for the current and next fiscal year within the past month. The screen also requires that no analysts lowered their estimates for the current or next fiscal year during the past month. Only 36 stocks survived these filters, and the 30 best-performing during 2007 made the First Cut.

    Stocks making the First Cut are ranked by year-to-date price change. The historical and expected growth rates provide a feel for past economic strength and the longer-term expectations priced into a company. The price-earnings ratio gives an indication of the high valuations of many of these stocks. The past quarterly earnings surprise data provides a historical perspective as these stocks head into the current reporting season.

    While it is risky to chase recent performance, firms with sustainable growth potential can be rewarding investments.

     


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