(In a recent Wall Street Stock Forecaster hotline, we updated our buy/sell/hold advice on a technology stock that uses one of our favourite hidden assets to maximum effect. Read on for further details.)

By hidden value, we mean valuable assets that are not getting the attention they deserve from investors. When a company’s assets are wholly or partially hidden, the stock trades for less than it’s really worth, so you get to buy at a bargain price.

High research spending sets tech stocks up for long-term gains

One of the key hidden assets we look for when we’re analyzing tech stocks is high research spending. That’s because tech stocks have to treat their research spending as a day-to-day expense, much like maintenance or taxes. So research spending comes out of the current year’s sales, and it lowers the current year’s earnings. That makes technology stocks with high research spending appear less profitable than they are.

As a result, many tech stocks’ earnings per share may look lower than those of companies in other sectors. That causes some investors to overlook promising tech firms, or see them as overpriced.

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However, research spending has the potential to pay off in dramatic long-term returns. That’s because the products that grow out of this spending will help tech firms increase their long-term sales and profits.

This tech stock’s high research spending continues to fuel its growth

In a recent Wall Street Stock Forecaster hotline, we updated out buy/sell/hold advice on a technology stock that spends a high 15% of its sales on research, chipmaker Intel Corp. (symbol INTC on Nasdaq).

The company has been putting this spending toward developing new chips. For example, the tech stock’s hugely successful Atom chip is used in “netbook” computers. (Netbooks are small, inexpensive laptop computers whose processors are less powerful than those of traditional laptops. Because of their lower prices and portability, they are currently selling faster than desktops and laptops.)

The company is also working on chips for the fast-growing smartphone market. It is developing these chips in partnership with cellphone maker Nokia.

Intel earned $2.9 billion in its latest quarter. That’s up 175.2% from a year earlier. Sales rose 34.2%. Rising spending on new computers by businesses was the main reason for the strong results: Sales of chips for servers (or computers that manage shared files or programs on a network) and business computers rose 42%. Sales of chips for personal computers rose 31%.

The company has also started production at its new, more efficient factories. That has helped improve its profit margins.

You can get our full analysis of the Intel and other stocks in the fast-changing U.S. market in Wall Street Stock Forecaster. Click here to learn how you can get one month free when you subscribe today.

The company makes the “da Vinci,” a computerized surgical system for use in heart surgery and other procedures. The da Vinci is safer and far less invasive than regular surgery. It also cuts patient recovery time and post-operative discomfort.

In the latest quarter, Intuitive’s revenue climbed 74.4%, to $328.6 million from $188.4 million a year earlier. Earnings per share jumped 205.6%, to $2.20 from $0.72. Intuitive should earn $7.75 a share this year, up 27.7% from $6.07 last year.

Many hospitals cut equipment spending in the recession. Now, the economic recovery should spur da Vinci sales. More hospitals are also using robots to perform surgery, largely because of Intuitive’s successful marketing.

At current prices, the stock may be vulnerable to any negative news. But we feel it has substantial growth ahead.

Intuitive Surgical is still a buy.

Nissan plans to ship the LEAF to selected U.S. dealers in December, and sell the car nationwide in 2011.

The LEAF will carry a manufacturer’s suggested retail price of $32,780 U.S. When you include a $7,500 federal tax credit, the car’s price will fall to $25,280. The LEAF will also be eligible for further rebates in California and some other states. Nissan will offer a lease program starting at $349 a month, not including tax credits.

Customers who buy the LEAF will also be able to buy personal charging docks from Nissan. These docks, which operate on a 220-volt supply, will cost an average of $2,200. That includes a home assessment, but not installation. However, both the charging dock and installation are eligible for a 50% federal tax credit.

Using current average U.S. electricity prices, Nissan estimates the LEAF will cost less than $3 to “fill up.”

Nissan Motor is still a buy.

The company licenses patents based on its own innovations. It also buys patents, and has secured sublicensing rights to others.

Selling to world leaders

Thanks to Mosaid’s long history of designing computer chips, the company has a wide range of techniques and technology patents to license. Its customers include Nokia, Sony, Sanyo, Buffalo Inc., Oki Semiconductor and Samsung Electronics. Mosaid’s licenses require each licensee to pay an agreed amount over a fixed period of at least one year.

In its third quarter, which ended January 31, 2010, Mosaid’s revenue fell 2.0%, to $17.7 million from $18.1 million a year earlier. The revenue drop was mainly caused by the bankruptcy of a licensee. As well, most of the company’s licensing income is in U.S. dollars, so the higher Canadian dollar hurts its overall revenue.

Mosaid earned $7.3 million, or $0.70 a share, in the third quarter. That’s up 37.7% from $5.3 million, or $0.53 a share. These figures exclude several unusual items, such as foreign-exchange gains and losses. Mosaid spent $621,000 (or 3.5% of its revenue) on research in the quarter. That’s up 15.2% from $539,000 (or 3.0% of revenue) a year earlier.

The company holds cash of $70.3 million, or $6.81 a share. It has no long-term debt.

Mosaid has renewed its patent-license agreement with Samsung for five more years. This deal should generate $50 million to $80 million of revenue for Mosaid. The company will also buy certain patents from Samsung for $11.6 million. Mosaid will pay for these patents in stages until 2014.

To help pay for these patents, Mosaid recently raised $31 million by selling 1.4 million new common shares for $21.65 each. Moreover, Mosaid and Samsung will form a joint venture to develop new high-performance memory chips.

Wireless contracts add to growth

In 2009, Mosaid added several patents for wireless devices to its portfolio. And, in addition to Samsung, it recently gained two new customers who routinely license wireless patents.

In February 2010, Sony Corp. agreed to license some of Mosaid’s technology for its wireless products, such as cellphones, mobile computers and video-game consoles. Mosaid did not say how much revenue this deal would generate, or the length of the contract.

In April 2010, Japan’s Sharp Corporation licensed Mosaid’s patents for certain wireless devices, including cellphones and notebook computers, for a five-year term. Mosaid didn’t disclose the terms, but Sharp is Japan’s leading seller of cellphones.

Mosaid trades at 8.5 times the $2.60 a share it will likely earn in 2010. It pays a quarterly dividend of $0.25 a share, for an annualized yield of 4.5%.

Mosaid is a buy for aggressive investors.

In its first quarter, which ended February 28, 2010, Gennum’s revenue rose 52.5%, to $29.5 million from $19.4 million a year earlier (all amounts except share price and market cap in U.S. dollars). The company mainly sells its products to television broadcasters, and the improving economy is giving these clients more money to spend on new equipment. Demand for its data-communication products is also rising. Higher sales were the main reason why Gennum earned $0.12 a share (or a total of $4.0 million) in the latest quarter. It lost $0.02 a share (or $844,000) a year earlier.

Gennum spent $8.3 million (or 28.2% of its sales) on research. That’s up 11.6% from $7.5 million (or 38.6% of sales) in the year-earlier quarter. It has also deferred $1.8 million in research costs to future periods, and will write them off once it starts selling the resulting new products. However, there’s no guarantee of success. That increases the risk of a future writedown.

Gennum is now a buy.

In the three months ended December 31, 2009, Aastra’s earnings per share jumped to $1.11. A year earlier, the company earned $0.10 a share. Despite the higher earnings, revenue fell 16.8%, to $217.8 million from $261.8 million a year earlier, mainly because of the weak economy. However, revenue was up 9.6% from the previous quarter.

In April 2008, the company bought the business-communications division of Swedish telecom giant Ericsson. Aastra has now finished integrating this purchase. That has eliminated overlapping costs and pushed up the company’s profits.

Aastra continues to buy money-losing product lines. In many cases, distressed sellers have spent large amounts of money developing these products. These purchases add risk, but, as the Ericsson example shows, Aastra has a long track record of successfully integrating new businesses.

The company holds cash of $116.9 million, or $8.41 a share, and has no long-term debt.

Aastra continues to buy back its shares. That should push up its earnings per share and stock price. The company has also raised its quarterly dividend by 33.3% with the March 2010 payment, to $0.20 from $0.15. The shares now yield 2.4%.

The shares now trade at 8.4 times the $3.95 a share that Aastra is forecast to earn this year.

Aastra is still a buy.

RUGGEDCOM INC. $19.85 (Toronto symbol RCM; SI Rating: Speculative) (1-888-264-0006; www.ruggedcom.com; Shares outstanding: 12.1 million; Market cap: $240.2 million; No dividends paid) makes computer-networking equipment that is used in harsh environments. The company’s products are designed to reliably operate under high levels of electromagnetic interference. They can also cope with wide variations in temperature and humidity, as well as vibration and exposure to dust. They also work while exposed to such things as corrosive gases and water.

RuggedCom’s products include Ethernet switches that connect computers together and let them exchange data at high speeds. It also makes Internet-based networks that are faster and more functional than systems that are now used in harsh environments.

In the three months ended December 31, 2009, RuggedCom’s revenue rose to a record $20.6 million. That’s up 30.2% from $15.8 million in the year-earlier quarter. If you exclude the contribution of wireless broadband provider WiNetworks, which RuggedCom bought in September 2009, RuggedCom’s revenue would have been $19.9 million, for a 25.9% increase.

Despite the higher revenue, RuggedCom’s earnings fell 70% in the latest quarter, to $1.2 million, or $0.10 a share, from $4 million, or $0.34. However, the drop was largely caused by one-time costs, including expenses for integrating WiNetworks, a stronger Canadian dollar (which lowered the contribution of its foreign sales), and certain research and marketing costs.

RuggedCom is a buy for aggressive investors.

Gennum mainly sells its products to television broadcasters. However, the slow economy has hurt TV advertising revenue. That has prompted these clients to cut spending on new equipment.

As a result, Gennum’s revenue fell 32.4% in the year ended November 30, 2009, to $85.2 million from $126.9 million in the prior year (all amounts except share price and market cap in U.S. dollars). The company lost $0.07 a share (or a total of $2.6 million) in fiscal 2009. However, that was mainly because of a $5.9-million charge related to a 10% cut that Gennum made to its workforce. It earned $0.54 a share (or $19.3 million) in 2008.

Gennum spent $30.6 million (or 35.9% of its sales) on research in 2009. That’s down 16.5%, from $36.6 million (or 28.8% of sales) in 2008. Gennum sold some operations during the quarter; that was the main reason for the drop. It has also deferred $3.2 million in research costs to future periods. It plans to write these expenses off once it starts selling the resulting new products. However, there’s no guarantee these products will be successful, so future writedowns are possible.

The stock trades at 16.0 times its likely 2010 earnings of $0.37 U.S. a share. However, Gennum needs a sustained recovery to spur its sales.

Gennum is still a hold.

By hidden value, we mean valuable assets that are not getting the attention they deserve from investors. When a company’s assets are wholly or partially hidden, the stock trades for less than it’s really worth, so you get to buy at a bargain price.

High research spending could mean big gains lie ahead for technology stocks

When we pick stocks in the more volatile technology field, one of our favourite hidden assets is high research spending. That’s because technology stocks have to treat their research spending as a day-to-day expense, much like maintenance or taxes. So research spending comes out of the current year’s sales, and it lowers the current year’s earnings.

As a result, many tech stocks’ earnings per share may look lower than that of stocks in other sectors. That causes some investors to overlook promising tech firms, or to see them as overpriced.

However, research and development spending has the potential to pay off in dramatic long-term returns. That’s because the products that grow out of this spending will help tech firms increase their long-term sales and profits.

My #1 U.S. pick could easily make you 50% or more profits in 6 months or less. You'll learn all about this exciting company in my Wall Street Stock Forecaster newsletter. Plus, every month I'll reveal other high-quality, low-risk U.S. stocks with the potential to bring you big gains. Click here to learn how you can profit from Wall Street Stock Forecaster.

High research spending will help leading technology stocks profit from a rebounding economy

We see high research spending as an especially important ingredient for technology stocks that will profit from a global economic recovery. That’s because they’ll be ready with new and improved products as businesses and consumers increase their technology spending.

In the current Wall Street Stock Forecaster, we’ve published a special analysis of 4 tech firms that stand to benefit from an economic recovery. As part of our analysis, we update our buy/sell/hold advice on all of these companies, including Autodesk (symbol ADSK on Nasdaq). The tech stock’s research spending is a very high 26.7% of its revenue (or $457.5 million U.S.).

Autodesk makes computer-assisted design software that lets engineers and architects analyze their products’ performance early in the design process. That saves time and money, and improves the quality of the final product.

The company’s revenue and earnings fell in its most recent quarter. That’s mainly because its customers put off upgrading their computer-aided design software because of the weak economy.

Even so, Autodesk has kept its research spending high. And its strong balance sheet should let it maintain its high research spending: the company is debt free, and holds cash of $1.0 billion, or $4.37 a share. That bodes well for the technology stock’s long-term prospects.

You can get our special analysis of technology stocks, which includes our latest buy/sell/hold advice on Autodesk and 3 other tech firms, in the latest Wall Street Stock Forecaster. What’s more, you can get this issue absolutely free. Click here to learn how.

In Autodesk’s 2010 fiscal year, which ended January 31, 2010, its revenue fell 26.0%, to $1.7 billion from $2.3 billion in the prior year. That’s mainly because several of Autodesk’s customers put off upgrading their computer-aided design software because of the weak economy.

In response to the lower revenue, Autodesk cut over 10% of its workforce and consolidated certain facilities. These moves lowered its expenses by at least $250 million in the latest year.

If you exclude restructuring costs and other unusual items, Autodesk earned $231.7 million, or $0.99 a share, in fiscal 2010. That’s down 48.3% from $447.8 million, or $1.95 a share, in fiscal 2009.

Autodesk’s research costs fell 20.6%, to $457.5 million (or 26.7% of revenue) from $576.1 million (or 24.9% of revenue) in the prior year. That’s mainly because the company laid off computer programmers as part of its restructuring. Still, Autodesk’s research spending is nearly twice its earnings. Products that grow out of this spending will help it remain a leader in its niche markets, and quickly increase sales as the economy recovers.

The company should be able to maintain its high research spending: it is still debt free, and it holds cash of $1.0 billion, or $4.37 a share.

Autodesk’s earnings will likely fall to $0.76 a share this year, and the stock trades at 36.8 times this depressed figure. However, we feel the company’s earnings will snap back over the next few years due to its leading market share and lower operating costs.

Autodesk is a buy.

Computer sales have risen with the recent launch of Microsoft’s Windows 7 operating system. Symantec has deals to pre-install its Norton Anti-Virus software on new computers, so it stands to gain as more consumers buy new computers to get Windows 7. As well, the company has shifted its focus to selling services to its business customers. Long-term service contracts give Symantec more predictable revenue streams, and cut its risk.

In Symantec’s third quarter, which ended January 1, 2010, its earnings before one-time items fell 7.4%, to $326.0 million from $352.0 million a year earlier. Earnings per share fell 4.8%, to $0.40 from $0.42, on fewer shares outstanding. Revenue rose 0.8%, to $1.55 billion from $1.54 billion. Symantec gets about half of its revenue from outside the U.S. If you adjust for foreign-exchange rates, revenue would have fallen by 3%.

Symantec continues to invest heavily in research. It spent $210.0 million (or 13.6% of its revenue) on research in the latest quarter. That’s up 8.2% from $194.0 million (or 12.8% of revenue) a year earlier.

The stock trades at just 11.6 times the $1.47 a share that Symantec is expected to earn in 2010.

Symantec is a buy.