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Four UK winners leading the tech charge
By David Brenchley | Fri, 12th May 2017 - 15:52
It's not surprising that many investors have a love-hate relationship with technology stocks. During the dotcom boom in the late 90s/early noughties it seemed so easy - dump your cash in tech stocks and watch them fly! Not anymore, although the sector is enjoying one of its best runs in 17 years.
The big dogs of FAMGA - Facebook (FB), Apple (AAPL), Microsoft (MSFT), Google (GOOGL) and Amazon (AMZN) - are all success stories, some from way back - Apple listed in the 80s and Amazon in 1997. Today, that quintet is worth a combined $3 trillion - bigger than the gross domestic product nominal of the UK at $2.5 trillion!
On the flip side, today I wrote about Filtronic, a tech firm that listed back in 1994. Its share price chart since 1999 is a lesson in, as Julian Chillingworth, chief investment officer at Rathbones, puts it, how investing in tech "can be a sure-fire way to destroy wealth".
"Many an investor has rued the day they listened to a persuasive analyst talk about a fascinating new innovation," he says.
Still, nowadays it's a whole different ball game - and there's plenty of money to be made backing companies at the very forefront of the tech revolution. But picking the winners of tomorrow is tricky.
"You may be right about the potential of a particular technology, but you also need to identify how it will be adopted and which companies will profit," Chillingworth says.
NASDAQ, the tech-heavy US stockmarket, is up a huge 36% since China's troubles in early 2016 with some of the largest tech firms leading the charge. Chip designer NVIDIA (NVDA) is the best performer in the NASDAQ 100, up 321% since then. Even car manufacturer Tesla (TSLA) is now a big beneficiary of technological advances and is at the forefront of bringing the electric car to the mainstream market.
|Rank||Company||Market Cap ($bn)||Performance (%)|
|Source: Sharepad. Performance data since 18/02/2016|
On this side of the pond, the FTSE techMark All-Share is up 14.5% since early last year and we have rounded up a few of the top performers below.
Microgen (MCGN) has almost tripled in value over the past 15 months.
It's done well this year, especially, and is currently up 82% in 2017. Its rise began late January on confirmation its Aptitude Software business had entered into 10 contracts last year with new clients around the world, resulting in a 40% increase in ongoing revenues. That sent shares up 7%.
Aptitude provides financial control and reporting software to some of the top telecoms, banking and insurance companies around the world.
A further surge in the share price came in March, when it reported an increase in annual operating profit of 26% and revenues up 35%. That took the stock up 11.5% to 262p and it's barely paused for breath since, hitting 336p.
|Rank||Company||Market Cap (£m)||Performance (%)|
|6||Micro Focus International||5,664.90||71.7|
|Source: Sharepad. Performance data since 18/02/2016|
Companies analyst Richard Beddard is a big fan of Renishaw (RSW). The company is a long-time constituent of his Share Sleuth portfolio and has produced a return of 84% since it was introduced as a holding.
Latterly, the stock is the fourth-best performer on the techMark index, returning 39% year-to-date.
The £2.5 billion firm is a world leader in engineering and scientific technology and its precision measurement tools help manufacturers maximise production output.
Its third-quarter trading statement showed revenues of £142 million up 13% on an underlying basis, with pre-tax profit of £33.6 million. The former was ahead of analyst expectations and investors responded positively.
Management raised guidance for full-year pre-tax profit by 7% to £99-108 million (from £85-105 million).
How far the firm's run - it's doubled since February - can go has been called into question by UBS analyst Mark Fielding. He reckons a strong run up to results - up 18% in three weeks - suggests those upgrades have already been priced in. He has a 12 -month price target of £31, implying downside of 12%.
XP Power (XPP), which provides power solutions, including AC-DC power supplies and DC-DC converters, has put on almost 50% year-to-date and is up 80% since February 2016.
A month ago, after a positive first-quarter update, Investec analyst Marc Elliott called the shares up to £27 - a 5% increase on his previous target price. Looks like he's called that spot on, with the shares up 21% since to an all-time high of 2,659p.
"A strong start to the year and, should the trends observed since the second half of 2016 continue, as appears possible, we foresee scope for further upgrades in the year ahead," he said. "XP Power appears well placed into economic recovery with a well-honed business model. The balance sheet also provides flexibility."
Not strictly a pure-play tech stock - an AIM share rather than techMARK - Dotdigital (DOTD) is still very much a beneficiary of the digital economy and has grown eightfold since listing on the junior market in March 2011.
Since February 2016, the shares have surged 48%, and Victoria Stevens, a former analyst at finnCap and now part of Liontrust's 'Economic Advantage' (EA) team running UK smaller company-focused funds, says small companies are often more nimble and responsive to change than their larger counterparts and can, therefore, disrupt established industries far more easily.
Liontrust's EA investment process identifies companies with characteristics that competitors struggle to reproduce. They focus on: intellectual property (IP); strong distribution channels; and significant recurring business.
Dotdigital's core product, dotmailer, enables companies to automate their email marketing processes. It allows marketing teams to build, launch and manage customer engagement campaigns quickly and efficiently, and to monitor vast amounts of useful data in terms of how people are engaging with the campaigns.
Anthony Cross, lead manager of Liontrust's Special Situations fund, told me recently that the firm ticked all the EA boxes, with strong IP in dotmailer, "robust distribution channels" and is highly cash generative with a high return on capital.
The digital economy has given software companies like Dotdigital the opportunity to generate higher revenues, Stevens adds. This has helped the company perform wonders share price-wise and, since at a shade above 8p, it has grown more than eightfold.
While the UK Smaller Companies fund has been invested for longer, Cross told me the Special Situations bought in early in 2017 around the mid-50p range. So far, its rise since represents a gain of around 27% for the fund. Nice work.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
|XP POWER LTD||3,380.00p||0.00%|
|All data 15min delayed as of: 05:02:31 19/03/18|