3 Tech Stocks to Buy on the Taper Tantrum

Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As the Federal Reserve hints at tapering the bond buying program over the next year, cyclical stocks including technology should become interesting buys. Tech stocks have underperformed the market rally over the last year as investors have piled into high yielding stocks as bond yields hit extremely low levels. Now that money should flood out of those stocks and bonds into growth stocks.

The main reason the Fed would stop bond buying would be a generally stronger economy, a situation that should benefit growth stocks. The group that should outperform in this rotation of money into growth stocks includes Fusion-io (NYSE: FIO), InvenSense (NYSE: INVN), and Millennial Media (NYSE: MM). These beaten down stocks not only offer the ability to rebound off weak trading, but the businesses could improve as economies around the world rebound.

As the chart below shows, these stocks have dramatically under performed the market since April 1, 2011 when Millennial Media came public:

<img alt="" src="http://media.ycharts.com/charts/e855026799b3ef72ce5d1f86e479c887.png" />

FIO data by YCharts

The group includes a selection of tech stocks from flash storage to motion tracking technology to mobile advertising. The diverse selection should provide an option for any investor.

Flash Storage Leader

While Fusion-io is seen as a clear technology leader in the sector, the company continues to run into pressures from being focused on two prime customers no longer growing at extreme rates. Both Apple and Facebook helped build the company up with vast orders of the advanced storage technology, yet now as those companies have matured the orders have stalled.

The company recently lost the CEO and CMO sending the stock to all-time, post-IPO lows. At only $13, the stock is only a shadow of the company when it hit maximum potential with the stock trading over $40 at the end of 2011. At the time, the market cap was soaring towards $4 billion. The biggest issue is that margins and profits have never been maxed out as the company focused on growth. Revenue is expected to surge 30% next year to $570 million making the stock at a market cap of $1.3 billion more appealing. The question is whether the new management team can turn the stock into a major winner by generating profits.

Motion Tracking

InvenSense has recently seen its fortunes turnaround as several analysts predict that the company has finally landed Apple as a customer. The company makes products used primarily in smartphones, tablets, and videogames to sense and track motions.

So while the stock has jumped recently from $9 to over $14, it still offers plenty of value considering the post-IPO surge to over $22 back at the start of 2012. Though InvenSense has tons of growth potential, the stock only trades at 17 times forward earnings prior to even including Apple as a major customer. Noteworthy is that Samsung has been a 30% customer recently providing an example of the potential impact of Apple. Revenue as well is seen growing at a 20% plus pace even before adding Apple.

Leading Independent Mobile Advertiser

Millennial Media offers interesting value as the company is growing at over 50% yet only trades at an incredible multiple of just over 2 times revenue. Mobile advertising is a fast growing sector with big competition from third party networks in Google and Apple and companies with their own networks in Facebook and Twitter. Regardless, mobile advertising is exploding as consumers continue to migrate to smartphones and especially tablets. Advertisers face a very complex scenario as consumers use multiple operating systems on hundreds of devices, hence the need to work with a leading mobile advertising network.

Though earnings were basically breakeven in 2012, analysts expect a fast ramp up towards earnings of $0.42 in 2014. The stock has been on the move since the April bottom below $6, yet it previously traded at $14 before the market panicked due to the company only being able to maintain 50% revenue growth.

Bottom line

As the market over reacts to the signals by the Fed that it will eventually need to reduce the aggressive bond buying program, investors should look to shift into growth stocks. Investors need to remember that even with reduced bond buying, the Fed is far from increasing the Fed funds rate from historical lows. The stocks of Fusion-io, InvenSense, and Millennial Media should be strong gainers as the economy eventually grows fast enough to support a reduction in Fed action. As that occurs, growth stocks will offer the only safety area in the markets as rate sensitive stocks and bonds in general get hit.

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Mark Holder and Stone Fox Capital Advisors, LLC own shares of Millennial Media and InvenSense. The Motley Fool owns shares of InvenSense. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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