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The Tech Play That's Better Than the "Next Google"

I probably spend more time than anyone searching for hot young startups that will make money for my readers – even as the companies themselves change the world around us.

I'm talking about firms like Google Inc. (Nasdaq: GOOG), which in nine years has grown from a newly public company into a Web search, digital advertising, and online video juggernaut with a market value of $230 billion (and a stock price of $705 a share).

But I'm going to let you in on a secret that I've learned from my three decades in Silicon Valley.

You don't always have to find the "next Google" to make big money.

In the near term you can reap windfall profits by searching for the beaten-down tech stocks that the institutional players seem only too happy to ignore.

Those laggards are often hidden gems … can come roaring back … and turn the market on its ear when they do.

To show you what I mean, let's look at the case of supercomputer player Cray Inc. (Nasdaq: CRAY). Earlier this week, the firm nailed a $23 million contract to supply one of its supercomputers to a German weather prediction center.

Compared with Google's huge market cap, that sounds like small potatoes. But that contract is a key part of a Cray comeback plan that I will tell you all about in a moment.

But first, you need a little context. In the months before Google's August 2004 IPO, Cray's stock cratered. Most tech investors wrote the supercomputer company off as a loser.

And it's kind of ironic that they were so dismissive. You see, Cray was kind of the Google of the 1970s – pioneering, as it did, the smoking-fast supercomputer … brawny machines that could crunch through mountains of data in nanoseconds.

But as the new century dawned, supercomputing began to lose its luster.

Why would anyone, the reasoning went, would want to invest millions in a supercomputer at a time when powerful PCs and the Web had emerged as the New Guard that would rule the planet?

Now, however, tech clients are once again beating a path to Cray's door. That's because, here in the Era of Radical Change, a field known as Big Data is growing by leaps and bounds.

At its heart, Big Data is a simple idea. Companies, research labs, and government agencies have oceans of raw, unstructured data that can be tapped to solve a wide range of problems.

We're talking challenges as diverse as tracking climate change … using DNA as a cure for disease … and sorting through billions of online transactions per day in a search for patterns that would reveal fraud or embezzlement.

As this desire to tap into Big Data makes its way around the world, Cray has again emerged as the technical leader in its field. It boasts the world's fastest supercomputer. Not only that, but it's picking up new multi-million dollar contracts right and left.

And you know what that means…

Investors who turned their back on Cray over the past year missed the chance to smoke the market and most of the high-tech leaders.

Indeed, since ending 2011 at $6.47 a share, Cray's stock has zoomed 183% (it was trading at $18.32 early Friday afternoon).

During the same time frame, Google's shares have risen from $645.90 to $702.99 – a gain of 9%, or 1/20th that of the small-cap supercomputer firm.

And don't think that I "cherry-picked" Google in search of a favorable comparison. I compared Cray's returns against to the share-price performance of a long list of tech leaders.

Cray came out on top each time.

If Cray continues on its present course, I believe it will go down as one of the great high-tech turnaround stories of the early part of this century. It's already one of the top rebounds of the past five years. In the last half decade the stock has piled up profits of roughly 240%.

Some of you may dispute my conclusion. After all, most investors would consider the comeback of Apple Inc. (Nasdaq: AAPL) as the best in that period.

But the numbers don't lie…

Since Jan. 18, 2008, Apple has returned 212% to investors, nearly 30 percentage points less than Cray.

So, how did Cray beat the so-called Big Boys in the last few years?

I believe the key event that led to this amazing success story begins in 2005. That's when the firm hired Peter J. Ungaro as president and CEO. He joined from International Business Machines Corp. (NYSE: IBM).

At Big Blue, Ungaro led global sales of hardware integral to the operation of what are now called high-performance computers. (Cray remains old school; it still calls its big machines "supercomputers.")

No doubt, the knowledge Ungaro gained at IBM has been used to engineer Cray's comeback. Ungaro, it seems, has beat IBM at its own game.

Faced with rising costs and customer concerns, IBM pulled out of a $188 million supercomputing contract at the University of Illinois back in the summer of 2011.

Guess who stepped in to save the day? That's right, Cray. In fact, stealing IBM's thunder also ranks as a milestone in the rebound of both the firm and its stock.

No wonder IBM has returned a mere 7.25 % to shareholders over the past year…

When it comes to spotting profitable turnarounds, I have a bit of an unfair advantage. See, many years ago I had dinner with the greatest turnaround artist of all time, former Chrysler Corp. CEO Lee Iacocca. I picked his brain about successful comeback strategies – and now know how to identify and track them.

Since then, I have made it a habit to keep an eye on battered firms that can rise from the ashes – because I know they can bring us the largest-possible gains.

I believe that when the history of the Era of Radical Change is written, Cray will easily make the winners list.

Not bad for a company that many investors had recently written off as hopelessly out of date.

So even as we together watch for the "next Google," I'll make sure that we're also looking for the "next Cray."

You can be sure that we'll find some of both.

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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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