How to spot technology stocks that are poised to soar

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 newsletter that covers the U.S. stock market.

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.

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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.