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These 2 Companies Could Solve A Major Problem In High-Tech

Of the 11 sectors covered by S&PCapital IQ , only one is on track for lower profits in 2013: technology.

Theprofit anemia stems from severalfactors , including:

  • Extremely low levels of government spending due to the current sequester.

  • Depressedsales activity in Europe. The tech sector has more exposure to Europe than any other sector.

  • A lack of any hot new products or trends to trigger interest among buyers.

Yet as we've noted many times, several tech firms are sitting on stunning levels ofcash . Cisco Systems (Nasdaq: CSCO) , Microsoft (Nasdaq: MSFT) , Oracle (Nasdaq: ORCL) and others may have a hard time generating organic growth, but they have a long track record of acquisitions to help get the needle moving.

Though it's unwise to buy astock simply because you suspect it is abuyout candidate, you can't ignore a company's appeal in amerger andacquisition (M&A) scenario if it has a strong base of technology or an impressive customer list. And you surely need to pay attention if that stock has recently traded sharply lower, creating more compelling valuations for a potential buyer -- or simply on a stand-alonebasis .

Here are two slumping techstocks that now hold solid value in light of their considerable growth prospects andmarket positioning.

Palo Alto NetworksFusion-io

Fusion-io offers a line of computer hardware components aimed at consumers and businesses.

I have written about Fusion-io ( FIO ) several times in the past (and you can always read about any stocks we cover by typing theticker symbol into our search box), and I've repeatedly takennote of the company's radical and game-changing approach to data storage management.

Trouble is, management was never able to clearly articulate the company's approach. Analysts at Lazard noted: "To some, FIO is a componentvendor , a business based on PCIe-based flash cards thatwill inevitablycommoditize . Others correctly point out that FIO boasts a unique software portfolio, but we believe many are oblivious as to what the strategy and value proposition of FIO's software portfolio really is. While we all have our view, we believe there may have been an identity crisis within the company itself." Those analysts see shares rising to $23.

That confusion has led to a shake-up in management and a 55% drop in the stock from the52-week high . Yet even with that turmoil, this is still a fast-growing business. Sales shot up from $36 million in fiscal 2010 to $359 million in fiscal 2012, and analysts see that figure exceeding $550 million in Fusion-io's currentfiscal year , which began this week.

As is the case with Palo Alto Networks, Fusion-io isinvesting heavily to handle the next leg of growth, which is dampening profits. That's a real turn-off for myopic investors, but crucial if this company is to eventually meet its goal of $1 billion in annual sales. At a minimum, it's a necessary effort to ensure that this business realizes its full potential if new management decides toput the company up forsale .

Risks to Consider: Never buy a stock solely on the basis of buyout hopes. Instead, look at possible M&A activity as a potentialcatalyst .

Action to Take --> It's hardly a bold move to predict that we will see major transactions in the technology sector in the second half of this year. Deal-making is the lifeblood of this sector, and cash-rich balance sheets, along with an anemic top-line organic growth, set the stage for more deals. Whichever tech stock you are researching, analyze them in the context of the broader landscape. Do the companies you're looking at have the right products or customerbases that would hold appeal to bigger players? Those traits have been markers for success in the past.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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