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Digging for Technology Gems


When people discuss tech stocks, the first ones that come up are often the elite names -- the Apples (AAPL) and the IBMs (IBM) of the world. Their exploits are exhaustively chronicled in the financial media, blogs, message boards, etc. But tech investing isn't about just the marquee names. There can be some good opportunities among the smaller fry.

That was the impetus for this week's screen. To search for some attractive, lesser-known tech names, we started off by doing the exact opposite of one of our frequently used screen criteria. To wit: We looked for stocks in the information technology sector that are not covered by S&P's Equity Research analysts as part of our Stock Appreciation Ranking System (STARS) universe. That helped ensure that our screen would turn up less widely followed -- and, by association, more highly valued -- tech stocks.

CHEAP, BUT SOLID. Indeed, once you look beyond the higher p-e big guns of the sector, it becomes apparent that not all technology issues are expensive. For our next filter, we searched for stocks with a forward price-to-earnings growth (PEG) ratio below 1. As of Mar. 17, the S&P 500 index carried a PEG ratio of 1.4, and the S&P 500 Information Technology sector had a PEG of 1.5.

But we wanted to make sure that these companies weren't cheap for a good reason. To ensure that these were solid outfits, we searched for companies with healthy balance sheets. We looked for companies with a current ratio (current assets divided by current liabilities) above 2, a debt/equity ratio below 5%, and a return-on-equity above 20%.

To avoid extremely speculative issues, we limited our screen to stocks with a share price above $5.00 and a market capitalization above $500 million. When our search was finished, these nine names emerged:


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