Tech stocks are having a banner year in 2017. The tech-heavy NASDAQ Composite Index has gained 27% year to date, far ahead of the broader S&P 500 market tracker's 18% upside.
But a handful of technology stocks seem spring-loaded for even bigger things in 2018. Read on to see why I would recommend building a bullish position in Impinj (PI 0.65%), Extreme Networks (EXTR -1.89%), and NeoPhotonics (NPTN -0.19%) before the new year rolls in.
This Chinese conundrum won't last
Back in June, I found this maker of fiber-optic networking components so undervalued that I opened a real-money position. Six months later, I'm nursing a 25% paper loss on that investment -- but that pain won't last.
NeoPhotonics shares suffered two drastic haircuts in August and October, in both cases due to a surprising slowdown in component orders from large customers in China. Networking giant Huawei, which is NeoPhotonics' largest customer by a wide margin, is tapping the brakes on its infrastructure investments due to regulatory pressure from the Chinese government.
So NeoPhotonics has scaled back its manufacturing operations until the Chinese situation turns around. But research and development budgets never shrank, and the company expects a full recovery once Huawei gets its act together. According to a recent report from analyst firm DA Davidson, Chinese network builds have started to pick up again and NeoPhotonics is already enjoying a higher order volume. The real bounce should become obvious by the middle of 2018, says analyst Mark Kelleher, but investors will probably catch on before NeoPhotonics reports second-quarter earnings.
This is one of those textbook cases where a patient investor can buy and hold shares as the company works through short-term issues, reaping a large return on the investment a few years down the road. And you can get an even better deal than I did, starting from a 25% lower buy-in price.
Another rebounding ticker
Like NeoPhotonics, Impinj has seen its share prices plunging recently due to temporary changes in its largest target markets. Unlike NeoPhotonics, the radio frequency ID specialist's stock doesn't look cheap from any traditional angle. Even so, I would be more than comfortable with buying Impinj shares today, 61% below their 52-week highs and at the princely valuation of nearly four times the company's book value.
Impinj has seen some of its largest clients hit the pause button on their RFID installations in order to plan, test, and prepare their own long-term plans. These rest stops have been reported across several industries and RFID functions, ranging from retail inventory management to hospital patients' record tracking.
There's no doubt in my mind that these projects will hit the runway next year, requiring Impinj to ship billions of RFID chips along with a proportional volume of chip readers and supporting software.
"In the short run, the market is a voting machine, but in the long run it is a weighing machine," according to master investor Benjamin Graham. At the moment, many Impinj investors are ignoring this rosy future to focus on short-term problems instead. In the long run, Impinj will remind us all that it's no lightweight in its chosen field.
If NeoPhotonics and Impinj seem to be cut from similar cloth, Extreme Networks is a very different beast.
The company was long known as a maker of traditional Ethernet routers and switches, aimed right at the enterprise data center. Through a series of plug-in acquisitions, Extreme has rebuilt itself into a complete enterprise networking specialist, with solutions ranging from fiber-optic gateways and business-class Wi-Fi networks to modular Ethernet routers and software-defined switching systems.
Thanks to this buyout-based strategy, Extreme has emerged as a serious peer to the largest networking companies on the market. Management wants to steal market share from Hewlett-Packard Enterprise (HPE -0.47%) and Cisco Systems (CSCO 1.74%) over the next few years, becoming what CEO Ed Meyercord calls "the only pure-play networking provider" in the enterprise space.
At the heart of this broad product portfolio, you'll find Extreme focusing on network management software and services. This is the glue that ties the company's many moving parts together, and the Extreme Network Management Center becomes another selling point for customers who want to control a unified network through a single central tool.
All told, additions like Avaya and Brocade have lifted Extreme Networks' trailing sales 31% higher over the last four quarters while free cash flows nearly doubled. Stock prices surged 150% higher over the same period, and that momentum should carry over into 2018.