Research spending is the key to explosive profits in tech stocks

Hidden value is one of the key factors we look for when we choose stocks to recommend in our newsletters and investment services, including Wall Street Stock Forecaster, our advisory that covers the U.S. stock markets.

(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.