The First Rule for Picking Winners in High-Tech Stocks

Michael A. Robinson

Last Sunday, I told you that the road to wealth was paved by tech.

I told you there was still hope for America – and for your retirement – because of the massive profits that high-tech stocks can generate.

But the truth is it's not enough to find an interesting company in a hot tech sector.

To score the kind of life-changing profits I told you about last week, you have to invest in the truly exemplary high-tech winners.

These are the companies that are changing the rules in computers, biotechnology, industrial materials, telecommunications, aerospace, and other cutting-edge sectors.

Those paradigm-changing ventures create markets where none existed, leapfrog existing technologies, and create products that their customers never even dreamed about… but then can't live without.

Great Companies Have Great Operations

Companies this innovative, this nimble and this explosive all share a common trait.

They all have great leadership.

Identifying such gifted leadership takes time. That's why I've developed such a vast network of contacts, and I spend so much time rubbing shoulders with industry leaders – especially high-tech CEOs. This allows me to learn about their business plans, competitive strategies and bankable high-tech trends.

It's because of this perpetual intelligence gathering that I know a man named Warren East is one of the most successful executives of the last 10 years – a period during which "disruptive technology" transformed countless longtime-tech leaders into perennial market laggards.

East and the hard-charging firm that he heads have created countless other winners. Apple wouldn't be the company it is today without East's contribution. Not by a long shot. Neither would Qualcomm Inc.

Nor would a slew of other firms that have ridden the mobile wave to industry prominence … and that created boatloads of profits for investors as they did so.

East serves as the CEO of ARM Holdings PLC (NasdaqGS: ARMH), which designs the chips and related devices used in many of the world's leading smart phones and other digital products. ARM is part of the new breed of "fabless" semiconductor firms: It designs the microchips and lets other firms make them – a "factory-less" business model that has helped knock the once-invincible Intel Corp. off its monopolistic perch.

With my five tech-investing guidelines in hand, you could have spotted East as a guy to watch. Well, really as a guy you could trust with your hard-earned money.

And you would have been richly rewarded – I'm talking about huge gains here.

In my report on Sunday, I mentioned a study that found that 57% of U.S. workers have less than $25,000 in savings.

Well, had you taken that $25,000 five years ago and invested it into East's firm, you would be sitting on $196,000 right now (of course, that's before Uncle Sam's grasping hands grab his "share").

That's a return of more than 680%.

To my knowledge, there isn't one "blue-chip" industrial stalwart that can deliver anything close to that level of profits.

That's why I continue to insist that "the road to wealth is paved by tech."

But don't take my word for it. Just look at ARM Holding's five-year stock gains compared to the so-called titans of tech:

1. ARM Holdings, 680%
2. Apple, 222%
3. Google, 85%
4. Intel Corp, 2.6%
5. Microsoft, 1.2%

Of course, strictly speaking, ARM Holdings is no longer a small cap. It's now worth about $19 billion. But just five years ago, it was a fraction of its current market size.

I was thinking about all this the other day when I read that East has decided to retire at the ripe old age of 51.

What a career he's had…

He was originally hired to start the firm's consulting business. Within three years, he made COO. He became CEO in just four more.

Over the next few years, as the history of the "mobile wave" is written, you can bet that East will be named to that sector's Hall of Fame.

Heck, he might even be one of the inaugural inductees.

Clearly, I'm sad to see him stepping down after such an amazing run. But truth be told, his reason for leaving makes a lot of sense – and may, in fact, set the stage for ARM's next growth surge.

East says he wants to step aside and let someone with more energy for the changing digital tech market take over.

Effective July 1, company president Simon Segars becomes CEO. He knows ARM – and the chip market – cold.

Segars joined the firm back in 1991 and has climbed steadily through the ranks. He is also a deep technologist who holds several patents. Since he has worked with East for nearly 20 years, he has learned from one of the best.

Segars takes over a company that basically has a license to print money. That's what makes an intellectual property ("IP") firm like ARM so valuable.

It designs the semiconductors for a wide range of digital devices – mobile phones, tablets, smart meters and DVD players.

And its strategy of letting other firms make the chips that it designs is so shrewd because it allows ARM to stay focused on inventing one "secret sauce" after another – and not on the challenge of manufacturing, which can add billions to the cost of products sold.

Given this approach, it's no surprise at all that ARM makes so much money. It has operating margins of 37% and a recent quarterly earnings gain of 28%. It has $623 million in cash on hand and almost no debt.

Under East (and now Segars), ARM's success doesn't turn on the singular vision of a lone creative genius. The company's technology is embedded in products sold by dozens of firms.

So no matter who wins or loses in the mobile-market wars, ARM stands to gain.

Any way you look at it, that's a great business model. ARM has generated a huge profit for investors thanks to a strong business operation topped by one of the shrewdest leaders in that sector.

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Michael A. Robinson

About the Author

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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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