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The best bets for technology investors in search of growth

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Few investment sectors enjoy technology's potential for explosive profit growth, but an apparent changing of the guard has made this growth harder to find.

As Canadian investors are painfully aware, market action has moved away from handset manufacturing – far away – without new clear leadership emerging from the industry.

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Where has the growth gone? Mobile device components and efficiency-related logistics software.

The accompanying table screens the U.S. technology sector by profitability, sales growth, performance and valuations in an attempt to find the new growth engines in the sector.

Profitability in terms of gross margin is uniquely important for technology investors. Rising margins are a sign of increasing market share while conversely, deterioration in gross margins was the first harbinger of doom for both BlackBerry and Apple stocks. In a sector where price-earnings ratios often reach extremes, changes in gross margins have been an effective indicator of future stock price performance.

The year over year change in revenues is also listed on the table in order to disqualify companies that are improving margins solely through cost cutting. Companies like IBM Corp. and Sandisk Corp. have managed to improve margins, but the sustainability of higher profits must be questioned because of declining sales.

Logistics software companies are well represented on our screen. The improvement in profit margins for Fidelity Information Services Inc. and Paychex Inc. has helped push their stocks higher by 51 per cent and 25 per cent, respectively, over the past 12 months.

Intuit Inc., developers of accounting and personal finance software, has shown similar improvement while growing sales.

Google Inc. is another winner on these criteria. The company continues to convert oceans of advertising revenue into seas of profits while turning the mobile operating system industry on its head during their spare time.

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Nvidia Corp.'s success in mobile computing is also apparent in the numbers. The maker of graphics chips and processors for mobile devices has grown sales by 7.1 per cent, improved margins by almost four percentage points and seen its stock price climb almost 20 per cent.

The table presents options for investors across the risk tolerance spectrum.

Conservative investors will be drawn to the steady growth of Paychex and Fidelity Information Systems. More aggressive investors, looking to benefit from scorching growth in mobile usage, should take a closer look at Nvidia.

Click here for a PDF version of the table.

Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here to read more of his Insights , and follow Scott on Twitter at @SBarlow_ROB .

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