Your Next Great Stock: How to Screen the Market for Tomorrow's Top Performers

Chapter 15. The Tomorrow's Breakthrough Screen

Most of us have seen what happens when a largely ignored company announces a breakthrough drug or a sudden advance in computer chips. Its shares usually soar right away. Wall Street scrambles to figure out just how much in profits the new technology will add over the next several years. Those who owned the shares before the announcement are left with an enviable choice: Sell them at a big profit or hold out for what might be an even bigger one.

Of course, for every one of those people who hold the right company at the right time, there are scores who sit on shares of technology companies that never produce the big breakthroughs. Wouldn't it be nice if there were a way to predict which companies are due for lucrative discoveries, and buy their shares while they're still cheap?

I'm glad I asked. As it turns out, there is a way to identify companies that are due to cash in on new developments. It doesn't require tea leaves or tarot cards. The only mysticism involved is that of America's accounting standards.

Technology breakthroughs are born of two parents. The first is an idea. The second is money. Ideas are difficult to predict and almost impossible for investors to learn about soon enough. But money is easy to follow. Before a new, say, memory chip goes into production, it goes through years of mock-ups, prototypes, tests, remakes, and so on. Technology companies spend piles of money each year to support such research. Because companies ...