Want to find a winning tech stock? Forbes’ America’s Fastest Growing Tech Companies is a good place to start.
Forbes’ list — which was released on June 5 and will appear in the magazine’s June 24 issue — is in its 11th year. According to Forbes, “Since 2003 a market-cap-weighted basket of each year’s Fast Tech 25 has beaten the Nasdaq, often by a wide margin, except in 2005, 2006 and this past year.”
The inclusion criteria:
–Market cap of at least $500 million
–Annual revenue of at least $150 million
–Sales growth of at least 10% for each of the past three fiscal years and over the past twelve months
–Estimated earnings growth more than 10% over the next three to five years
Forbes ranks its list by average 3-year sales growth. Its top five are LinkedIn Corp (NYSE:LNKD), Facebook Inc (NASDAQ:FB), Apple Inc. (NASDAQ:AAPL), 3D Systems Corporation (NYSE:DDD), and IPG Photonics Corporation (NASDAQ:IPGP). I’m going to rank another way.
Top 5 by estimated earnings growth
Earnings growth — cash flow from earnings, actually – is what drives a stock price up over the long-term. So, let’s sort Forbes’ list by estimated EPS growth.
| Rank | Company | Business | Est. EPS Growth | 12 Mo. Sales Growth | 3-Yr Avg Sales Growth |
|---|---|---|---|---|---|
| 1 | Social Networking | 51% | 80% | 102% | |
| 2 | 3D Systems | 3D Printers | 30% | 45% | 46% |
| 3 | Equinix | Data Center Services | 29% | 17% | 29% |
| 4 | athenahealth | Cloud-based Healthcare Services | 27% | 29% | 31% |
| 5 | IPG Photonics | Lasers/Amplifiers | 26% | 17% | 46% |
Source: Forbes
Valuations
Valuation matters. So, let’s take a look at PE’s and 5-year PEG’s for the companies on my list. The companies are listed by estimated EPS growth.
| Rank | Company | Est. EPS Growth | PE (ttm) | PE (frw) | 5-Yr PEG |
|---|---|---|---|---|---|
| 1 | 51% | 701 | 86 | 2.1 | |
| 2 | 3D Systems | 30% | 104 | 35.8 | 2.2 |
| 3 | Equinix | 29% | 64 | 40.5 | 2.9 |
| 4 | athenahealth | 27% | 202 | 60.4 | 3.0 |
| 5 | IPG Photonics | 26% | 22 | 17.3 | 0.8 |
Source: Yahoo! Finance; data to June 19
Stocks to consider
Here’s the rationale for honing in on the three I’m highlighting:
–LinkedIn Corp (NYSE:LNKD)– It has the top 1- and 3-year revenue growths, and the top 3-5 year estimated EPS growth. It provides services that are needed in good and bad economic times.
–3D Systems – It ranks high on both 1- and 3-year revenue growth; 1-year revenue growth is roughly the same as the 3-year, and its estimated EPS growth is the second highest. It’s involved in an emerging and disruptive technology.
–IPG Photonics – It ranks high on the estimated EPS growth list and is reasonably valued. I view the medical niche favorably.
This isn’t to say the others on Forbes’ list — notably, tech powerhouse Google — aren’t worth a look.
LinkedIn Corp (NYSE:LNKD) is a professional networking site that provides a valuable resource in all economic climates. There’s more unemployment and job hunting in bad times, and more job-hopping and employers hiring in good times.
