The Tantalizing Tech Sector

These companies are looking to commercialize exciting technology. But remember -- the risks of investing in such startups are high

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Investors looking for the next big thing tend to zero in on technology. After all, the technology sector has produced some of the greatest fortunes -- and flops -- of recent years. But whether it's companies working in biotech or those that have found a new way to use existing technologies for a competitive advantage, the story for investors is often the same: Small outfits working in untested areas can be a risky investment, no matter how cool they sound. This is especially true when the company, like several below, has yet to turn a profit.

But if you are looking for the future frontiers of profits, Five for the Money presents some companies marketing or using exciting technologies in their work. As ever, the watchword is caution.

1. A former defense contractor, Maxwell Technologies (MXWL) has reinvented itself with ultracapacitors, devices capable of recharging quickly and producing short but powerful bursts of energy. These devices are typically used to supplement other energy sources, such as fuel cells, to make them more efficient and able to deliver a consistent supply of power. Although ultracapacitors are not a new technology, their use could expand rapidly as they supplement fuel cells and other energy sources.

Ultracapacitors are used in numerous devices, such as energy-generating windmills, to keep them turning at a steady pace. But Maxwell thinks the auto industry holds the most promise. Maxwell's ultracapacitors are in a prototype hybrid BMW where they boost acceleration.

The company has not turned an annual profit since fiscal year 1999, and shortly afterward it began a restructuring program that turned its focus to ultracapacitors. It may be working. In 2005, Maxwell cut its net loss per share to 39 cents from 62 cents in 2004 as it increased revenues 41%, to $45.44 million. This has excited investors already. On May 5, the stock closed at $19.55, up from $7.42 last May.

2. Evergreen Solar (ESLR) is a strong-performing stock in the increasingly crowded solar-energy sector. Using a "string ribbon" process, the company manufactures solar-energy products that use photovoltaic cells, which are capable of generating electricity directly from sunlight. The proprietary process is designed to produce more solar cells from the same amount of silicon than other methods. In a recent report, Piper Jaffray (which makes a market for Evergreen) says it's optimistic that Evergreen's production will continue to grow more efficient.

The Marlboro (Mass.) group nearly doubled revenues in 2005, to $44 million, and cut its loss per share from 67 cents to 29 cents. On May 5 the stock closed at $14.26, up from $4.68 in late May, 2005, as analysts say Evergreen has a relatively secure supply of polysilicon, a material essential to the industry. "While trading should remain lumpy," wrote First Albany Capital in an April note, "we encourage buying on weakness." (The firm has a banking relationship with Evergreen.)

3. Genomic Health (GHDX) markets a test for determining breast-cancer patients' chance of recurrence, a factor that can help physicians determine if a patient should undergo chemotherapy to beat the disease or if a treatment with fewer side effects will suffice. Genomic's first product, Oncotype DX, is a test that measures gene expression in tissue samples from the tumor. From these data, a score is determined assessing the recurrence risk. CEO Randy Scott says the company is working on similar tests for other cancers.

In 2005 the company narrowed its loss per share to $4.15 from $13.82 in 2004. First-quarter 2006 revenue came in at $5.1 million, up from $1.9 million in the previous quarter. Although it's already on the market, Oncotype could have a regulatory problem. The product falls under the jurisdiction of a 1988 law established long before Oncotype and most similarly complex genetic tests existed. But the Food & Drug Administration is in talks with the company, and it could move to regulate Oncotype as a medical device.

In March, Piper Jaffray (which has a banking relationship with the company) downgraded the stock to sell on the grounds that regulatory worries had not been factored into the share price. In the improbable worst-case scenario, the test could be taken off the market for 18 to 24 months, says Piper analyst Edward Tenthoff. He adds that any steps taken by the FDA could ultimately benefit the company, as they would establish higher barriers to entry for competitors. "I believe in this test, and as we saw in the first-quarter results, the physicians do, too," Tenthoff says.

4. Pharmaceutical-enhancement outfit Depomed (DEPO) sells versions of existing medications that expand to about the size of a nickel after they are swallowed. The idea is to slow down the drug's release time and ensure that patients don't have to take them as frequently. The company also says its pills cause fewer side effects.

In 2005, Depomed won FDA approval for a diabetes drug and an antibiotic, the latter of which has been launched in the U.S. As a result, Depomed's revenue climbed to $4.4 million, up from about $200,000 in 2004. The improvement narrowed Depomed's losses slightly from $26.9 million to $24.5 million. The company has plans to commence a late-stage clinical trial for a slow-release version of the painkiller gabapentin, currently marketed by Pfizer (PFE) under the name Neurontin. Depomed believes a slow-release painkiller could have much higher commercial potential.

So far, this small-cap company's stock has responded. It closed at $6.67 on May 5, up from $3.77 a year ago. Oppenheimer, which makes a market for Depomed, assigned it a buy rating and an $11 price target in an April report.

5. Last year, HouseValues (SOLD) expanded its business beyond operating an Internet real estate listing service. The company introduced a new twist on searching for a place to live, HomePages. The Web service lets surfers find which homes are for sale. After displaying an aerial photograph of an area, the Web site incorporates descriptions, photos, and prices of available houses. Then users can find out about the neighborhood, including details like school districts, parks, and even nightlife, though service is spotty in some regions of the country. Those who like what they see can find the broker's contact information.

HouseValues market maker JP Morgan rates the stock neutral. In April it noted that the nifty HomePages site is helping HouseValues direct "qualified traffic" to LoanPages, its site for mortgage seekers.

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