One of the ways we evaluate tech stocks is through our concept of “innogration,” which means building a better product or service by harnessing an acquired company’s technological expertise, and applying that expertise to a new business. Occasionally, the result is an immediate hit, such as the Apple iPhone, but typically the full benefits of this evolutionary process take time to show success and so are hidden.

Good Bets

That’s the case for two of this issue’s stock recommendations, including Joe Duarte’s analysis of Diebold’s latest acquisition. The world’s leading producer of ATMs recently bought kiosk maker Wincor to create the next generation of machines customers will use to tap banking services. Investors generally don’t think of financial services businesses as being on the cutting edge of technology, but that is a great example of how innogration can work.

 Information technology has evolved enough so that companies in traditional industries can become more profitable by adapting technology from other sectors to fit their existing businesses. No matter which sector a company is in, it can always benefit from better marketing, as Alex Pape explains in his article about Web.com, a company that helps small businesses harnass the Internet in many different ways.

Earlier this year, the Internet marketing firm bought a smaller competitor possessing assets that dovetail perfectly with Web.com’s business, which will help Web.com sell more higher-margin services. That will set the stage for explosive growth.

Just as with Diebold, the magnitude of Web.com’s acquisition is easier to spot when viewed through an innogration lens.

Play the Fall

On the flip side are companies that have successfully developed technology that cannot stand on its own, so their only path to financial salvation is to be absorbed by another, more dynamic company.

 Identifying these companies can be quite lucrative, but you can make just as much money by pinpointing those that are destined to fall by the wayside, and then betting against them.

In this issue I make the case for betting against Autodesk by buying put options on it, as I believe the company is unlikely to be acquired by another looking to advance its innogration process.