The best growth tech stocks have lots of hidden value. Here’s how to spot it.

Hidden value is one of the key factors we look for when we choose stocks to recommend. By hidden value, we mean valuable assets that are not getting the attention they deserve from investors. The best growth tech stocks often hold hidden value that only savvy investors can spot.

When a company’s assets are wholly or partially hidden, the stock trades for less than it’s really worth, so you get to buy at a bargain price.

When we pick stocks in the more volatile technology field, one of our favourite hidden assets is high research spending. That’s because technology stocks have to treat their research spending as a day-to-day expense, much like salaries or taxes. So research spending comes out of the current year’s sales, and it lowers the current year’s earnings.

As a result, many growth tech stocks’ earnings per share may look lower than those of stocks in other industries. That causes some investors to overlook promising tech firms, or to see them as overpriced.

However, research and development spending has the potential to pay off in dramatic long-term returns. That’s because the products that grow out of this spending will help tech firms increase their long-term sales and profits.

We see high research spending as an especially powerful ingredient for technology stocks that will profit from a global economic recovery. That’s because they’ll be ready with new and improved products that businesses and consumers will want to use when they increase their technology spending.

Not all tech growth stocks are good investments. There are 4 main risk factors you face when investing in growth tech stocks. Below we look at ways you can minimize these risks—and increase your profits.

• Marketing is as hard as inventing: Even a great new product or computer program may fail to overcome retailer and customer skepticism. Growth tech stocks can have an uphill battle when they first hit the market.

• A tech stock’s acquisitions can bring “time-bomb” risk: Companies sometimes grow quickly by buying other companies. But sellers may simply want out of a losing situation. Growth by acquisition can work out, but it can also mean a waste of capital and time.

• Major tech stocks also make mistakes: Junior tech stocks often trumpet their deals with major firms, such as Apple. Apple has vastly more knowledge and bargaining clout than any individual investor. But it still invests in products that fail.

• High-tech shams are common: It’s easier to set up a company and sell stock to investors than to perfect a technological advance. Be especially wary when growth tech stocks splurge on elaborate web sites and glossy investor brochures.

You can minimize your risk to growth tech stocks by considering the following:

• Diversify: Growth tech stocks have more than their share of winners and duds. So invest carefully and buy 5 to 10 technology stocks instead of just one. Gains on your winners should overwhelm your losses.

• Focus on up-and-coming technologies: For this, you need to know how technology is changing. Read and absorb the latest tech blogs. Learn about the technologies that are exciting tech companies. For instance, rising use of wireless devices, like the iPhone and iPad tablet computer, is increasing demand for faster, more reliable wireless networks. 3D printing and virtual reality are exciting technologies that have Silicon Valley buzzing.

• Buy multi-product companies: Technological advances come in spurts, and leapfrog each other. Focus on growth tech stocks with a variety of existing or soon-to-be-released products, and avoid one-hit wonders.

• Look for earnings: A perpetual money loser will eventually go broke, no matter how impressive its technology. But if it makes even a little money, it can stay in business and perhaps reap the bonanza of a new product.

• Look closely at balance sheets:  Does the tech stock have real estate holdings? How much do they own? This could be another source of hidden value in the future.

• Look for loyalty: Does the growth tech stock in question have a loyal following? Apple is the perfect example of growth tech company that leveraged its loyal fan base to jump start the digital music revolution with the iPod.

Do you have any favorite growth tech stocks? Maybe there were some you’ve invested in the past. What was the hidden value you saw that made you attracted to them? Share your thoughts and experiences in the comments section below.