Time to Turn High-Tech "Rust" into Gold

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As a tech analyst I spent my early years in Detroit, and I know a lot about the Rust Belt.

In fact, when I moved to the West Coast in the mid-1980s, I drove a Honda that had already started rusting. Every once in a while, some wag would come up and ask if I was from the Midwest.

No doubt, rust like that was obvious. But in my more than three decades of working with Silicon Valley companies, I've found high-tech "rust" may be a lot less obvious and much more insidious.

The good news is that while this "rust" often takes down companies, it happens to be setting up three cash-generating firms that are handing us a big opportunity now...

How Rust Created Huge Profits for the Next Generation

When I say high-tech rust, I'm talking about firms that have stayed with an old line of business or an ingrained management style that causes them to miss huge shifts in the ever-changing tech landscape.

Of course, by its very nature, technology's relentless pace of innovation means once-great leaders can suffer blows that turn out to be fatal.

Wang Laboratories was one of the hot computing companies of the late 1970s and early 1980s. But in just a few years, the company went from running Super Bowl ads to filing for bankruptcy protection.

The story is even worse for Eastman Kodak Co. (NYSE: KODK). It actually invented the digital camera back in 1974 but instead focused on its thriving film business - until it was too late.

Kodak filed for bankruptcy protection in 2012 and emerged last year as a publicly traded firm.

But here's the thing. Even the rustiest of companies, the ones who have missed opportunity after opportunity to shift with the market, can still recover and flourish once again.

So, today, I want to take a look at three leaders that are cleaning off their rust to offer investors market-beating gains. Let's start with one of the oldest tech firms around.

Rust-Buster No. 1

Big Data

International Business Machines Corp. (NYSE: IBM) has worked for years to cut its dependency on hardware sales and transform itself into more of a global leader in software, services, and other growth sectors.

As a long-time defense analyst, this is something I have tracked for years because IBM is such an important federal contractor. I've even spoken with the head of the company's federal operations.

This was after IBM sold its sinking PC business in 2005 to Lenovo Group Ltd. (OTC: LNVGY). That was clearly an important break from the past for a tech leader that traces its roots all the back to the 1880s.

But it simply wasn't enough...

In this year's first quarter, sales at its systems-and-technology division, which includes its hardware business, dropped 23% to $2.4 billion. That marked the 10th consecutive slide in sales for that division.

So, it's a good thing IBM dumped another hardware unit earlier this year when it sold its low-end server unit to Lenovo for $2.3 billion.

Now, IBM's rust buster should be obvious - Big Data. This is a field that makes sense out of mountains of raw unstructured data to reveal things like online fraud, how to make homes more energy-efficient, and how to improve sales for large companies.

It seems like a natural fit. IBM pioneered data management during World War II and is looking at a huge market. IDC, a data analysis company, says Big Data and related analytics were largely responsible for the software industry's 4.5% growth last year to $369 billion.

Thus, new CEO Virginia Rometty has a clear mission: turn IBM into a Big Data powerhouse.

Investors think she has a good plan. IBM is up 7% over the past three months and poised to go higher. We're looking at some great return potential here by year end.

Rust-Buster No. 2

Cloud Computing

Since the late 1970s, Oracle Corp. (NYSE: ORCL) has remained at the forefront of leading-edge software development.

And that was the problem...

Simply stated, Oracle was late in shifting to the high-growth market of web-based cloud computing, in which clients pay vendors to host data and applications at remote computing centers.

Indeed, CEO Larry Ellison made waves in 2009 when he lampooned the cloud market as a lot of hot air. A video of Ellison's sarcastic remarks made the rounds on YouTube, which ironically enough is owned by Google Inc. (Nasdaq: GOOG), a bona-fide cloud leader.

Ellison actually added rust to his company in 2010 when he bought server maker Sun Microsystems Inc. It took nearly four years for Oracle to show any improvement in hardware sales.

That came in its recent earnings release for the fiscal third quarter when hardware sales grew 8% to $725 million.

More to the point, however, Oracle showed a huge increase in cloud-related revenue. Sales from cloud software subscriptions jumped some 24% in the quarter to $292 million.

Not only is that a huge increase, but that's a $1.2 billion annual run rate. And it also shows Oracle's potential rust buster - more cloud sales.

They still only equate to about 3% of Oracle's total revenue.

Oracle is on the right track with its move to the Cloud and has a lot of upside ahead in that sector.

Investors applaud the move. Oracle is up 10.03% over the past three months - not off the charts, but a rate of return that projects some great profits by year end, as I think it will.

Rust-Buster No. 3

Wearable Tech

For its part, Intel Corp. (Nasdaq: INTC) has struggled with the shift from PCs to mobile devices. Ironically, it was the firm's state-of-the art technology that held it back.

For decades, the Silicon Valley legend has pushed the boundaries of small-chip architecture. It's almost always first to market with semis that offer the most processing power available because it can put billions of transistors on a chip smaller than a postage stamp.

Trouble is, those powerful chips drained batteries and run hot, exactly the opposite of what's required for smartphones and tablets.

Here's what Intel's up against. Gartner says that in this year's first quarter, global shipments of PCs totaled 76.6 million units. But that's less than one-fourth the nearly 334 million smartphones and tablets shipped during the period.

Since Intel largely missed the mobile revolution, new CEO Brian Krzanich's has a different rust buster in mind - wearable tech.

Krzanich created a stir at the Consumer Electronics Show earlier this year when he displayed smart earbud technology as well as a baby monitor that can communicate with a coffee cup embedded with an Intel chip.

He also recently bought privately held BASIS Science Inc., the designer of what the company calls the world's most advanced wearable health tracker.

From an investment perspective, Intel's moves into mobile and wearables are paying off. It's outperformed the broad market by nearly 50% over the last three months with profits of more than 9%.

As you can see, all three of these leaders prove that companies who let years of rust develop can shake it loose and thrive once gain.

To do so, they need good leaders, a solid plan, and a clear focus on growth markets.

And over the last several weeks, all three have rewarded investors by delivering gains that have simply crushed the overall market.

About the Author

Michael A. Robinson is one of the top financial analysts working today. His book "Overdrawn: The Bailout of American Savings" was a prescient look at the anatomy of the nation's S&L crisis, long before the word "bailout" became part of our daily lexicon. He's a Pulitzer Prize-nominated writer and reporter, lauded by the Columbia Journalism Review for his aggressive style. His 30-year track record as a leading tech analyst has garnered him rave reviews, too. Today he is the editor of the monthly tech investing newsletter Nova-X Report as well as Radical Technology Profits, where he covers truly radical technologies – ones that have the power to sweep across the globe and change the very fabric of our lives – and profit opportunities they give rise to. He also explores "what's next" in the tech investing world at Strategic Tech Investor.

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