Make Millions in Tech

Silicon Valley is its own world ("the Valley"), with its own language (geekspeak), and its own commerce (ludicrous options grants). That's why many people I know would rather be forced to eat a gallon of soup with a fork than invest in tech stocks.

But forsaking all tech stocks can be a recipe for subpar returns. Consider Cisco Systems. This tech pioneer, which specializes in the once-esoteric business of networking equipment, delivered mind-blowing returns for early investors, despite the tech crash. You could have become one of them by doing a little extra homework.

Yes, you could have
What homework? Trade magazines such as Network World were a great source of information when tech investments were taking off. Had you been a reader in 1994, you would have learned that Cisco products were helping build the digital communications backbone of the Canadian government. In 1996, you would have learned that Ryder was depending on an advanced, Cisco-powered network to keep its fleet of trucks in top working condition. And in 1997, you would have learned that Cisco employees loved their jobs so much that they were happily putting in 60 hours or more per week building the latest routers.

At the same time, had you checked Cisco's annual reports, you would have seen outrageous sales growth:

Investors who seized the momentum in 1994 have seen their original investments increase more than nine times in value. But those who waited till January 1997 are sitting on a better than 250% gain today, which is more than double the market's return over the same time frame.

What about today?
It's tempting to say that the dot-com bubble was a unique time of massive growth, and that those days are gone, never to return. But I think that's crazy. Plenty of great tech stocks are available today, and some even look like Cisco did in 1995.

How to find them? Try the same trade magazines that worked back in the day. What you're looking for are technologies that corporate chief information officers (CIOs) are willing to spend big money on. A quick search of "spending priorities" in the 2006 archives at eweek.com brought forth this article, which suggests that business intelligence and data warehousing technology are still in demand.

Screening for opportunities in this industry isn't too difficult. Here's a list of candidates ranked by three-year sales growth:

I'm not sure there are any Rule Breakers among these mostly mature tech giants. But one or more may be very well positioned to capitalize on the push for software that makes business more efficient.

Take Informatica, which provides analytic software that also connects the dots between business systems. That's not an easy job, and Informatica seems to do it better than most. Consider its second-quarter results, which included a 26% year-over-year gain on the top line.

What's more, Informatica trades for roughly the same as its projected long-term growth rate. That could signal a bargain in an industry where most firms trade for a 40% premium to Street expectations.

Make millions in tech
Learning about the information technology industry isn't easy, but the rewards of study can be huge. That's why we devote significant time and energy searching for those opportunities at our Motley Fool Rule Breakers growth-stock newsletter service. We think hunting for the next big technological breakthroughs will lead to the highest possible returns.

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This article was originally published on July 15, 2006. It has been updated.

Fool contributor Tim Beyers only breaks the rules in his portfolio. Wimp. Tim owns shares of Oracle and has worked with Business Objects. Get the skinny on all of Tim's stock holdings by checking his Fool profile. The Motley Fool's disclosure policy is a rebel with a cause.