With stockmarkets around the globe seemingly in freefall, investors are certainly feeling the pressure. Having just been through the GFC many have been burned all too recently, however it is precisely in times like these that the opportunity arises to pick up quality companies at bargain basement prices. The trick is picking which are bargains and which are simply damaged goods.
Much as the headlines may proclaim that this is the end of the world, most companies will continue to do business and make profits, and share prices in many companies will recover once we find a bottom. That’s not to say that you should blindly dive into buying stocks that have been hit hard, or hold onto your portfolio in the hope that everything will turn out alright. Instead, this is the time to review your holdings and make some tough decisions about the stocks you hold. There are likely to be some that you will need to let go, replacing them with quality stocks that are likely to provide you with solid returns over the long term. If you hold a portfolio of high-risk, speculative stocks then diversifying your portfolio to include some solid, lower-risk companies may not be such a bad idea.
Today we analyse the Australian technology sector – which has held up better than most over the past week – to see which stocks may be worth a closer look.
The Australian information technology sector has been a disappointing performer over the past year, although much the same could be said for the wider market – particular after the week we just had. But this is precisely why investors should take a closer look, according to equities analyst James Samson, of Lincoln Indicators.
“Since the tech wreck, IT stocks may still be seen as volatile growth opportunities,” he says. “However, this attitude is changing as more companies begin to place greater emphasis on the role IT plays. High levels of customisation within IT systems coupled with an entrenched need for quality have become accepted traits of many businesses. IT is now a far greater priority in the strategy and success of a business. With the evolution of cloud computing, the hype has begun in tech markets once more.”
And this is hard to refute if you look at the surge in technology shares in the US, even factoring in the recent correction in share prices. Apple shares are up 56% over the past year, Google 57% and LinkedIn 102% after its recent IPO that soared over 90% on day one. The hype around the upcoming Zynga, Facebook and Groupon IPOs also point to a change for the better for the technology sector. Sure, Aussie companies can hardly be compared with these tech giants, but positive sentiment for the sector bodes well for upcoming tech companies here at home.
Samson argues that IT companies present investors with much more stable investment opportunities than in the past, while retaining the growth traits shown by the mega-corporations in the US.
The Australian IT sector consists of about 110 companies for a market capitalisation of about $12.25 billion. It’s relatively small market capitalisation may say something about company and sector risk when compared to S&P/ASX 200 market capitalisation of $1.157 trillion on June 21, 2011. According to Standard & Poor’s, the IT sector has been disappointing, posting a negative annualised price return of 7.76 per cent in the past 12 months to May 31, 2011. In contrast, the S&P/ASX 200 recorded a positive annualised price return of 6.29 per cent over the same period. However, Samson believes the performance of the IT sector will improve and become more consistent in response to an ever increasing and innovative role technology will play in managing and generating business.
Samson says cloud computing is a shining example of innovation and it highlights “the need for businesses to be adaptive to technological changes”. He says his choice list consists of financially healthy companies well placed to benefit from renewed investor focus in the IT sector.
Hansen Technologies (HSN)
Market capitalisation: $145 million
Price/earnings ratio: 10.67 times
Share price: 89 cents
Provides billing and rating systems to companies mostly in the energy, utilities and telecommunications sectors. The company generates about 40 per cent of revenue overseas, but Samson says it’s weathered the effects of a rising Australian dollar courtesy of a “natural hedge” in labour costs as offshore accounts for about 30 per cent. “Despite currency headwinds, Hansen recently upgraded earnings guidance,” Samson says. “Given the liquid and advancing nature of billing systems globally (for example, the rollout of smart utility meters), this company is well placed to take advantage of this opportunity.”
Market capitalisation: $334 million
Price/earnings ratio: 17.18 times
Share price: $1.10
Specialises in software solutions, with offices in Australia, New Zealand, Malaysia and the United Kingdom. The company services a broad market, including big corporations, government departments, universities and statutory authorities. After a positive half-year report, Samson expects the company to generate earnings growth of between 10 and 15 per cent this financial year despite increasing marketing and sales costs. “Should cash reserves remain high, shareholders could potentially benefit via a special dividend, or other capital management measures,” he says.
Iress Market Technology (IRE)
Market capitalisation: $1.03 billion
Price/earnings ratio: 16.77 times
Share price: $8.12
In financial circles, Iress Market Technology is widely known for its branded stockmarket and wealth management software systems in Australia, Canada, New Zealand and South Africa. Services predominantly include real-time data, analysis and news. Samson says as a market leader, the stock offers defensive qualities. “To complement these defensive qualities, the company’s dividend yield is above 4 per cent and this has been reasonably consistent in recent years,” he says. “The company’s financial health is strong.”
SMS Management and Technology (SMX)
Market capitalisation: $395 million
Price/earnings ratio: 12.6 times
Share price: $5.78
An outsourcing IT and consultancy firm servicing businesses in Australia, the UK and Asia. “What’s pleasing is the company’s high level of repeat business from existing clients in the financial and government sectors,” Samson says. “While we believe that IT consultancy represents more risk than a software or hardware provider, the importance of an efficiently run IT department is becoming increasingly vital to businesses. SMS offers investors with quality exposure to this segment.”
Legend Corporation (LGD)
Market capitalisation: $61 million
Price/earnings ratio: 9.15 times
Share price: 28 cents
Legend Corporation focuses on the design, engineering, manufacturing and provision of electrical, electronic and customised hardware. It offers a diverse range of products, including integrated circuit boards, memory modules, electric cables and hydraulic tools. Samson says Legend is a financially healthy company, generating good growth over recent periods. “However, with a small market capitalisation of about $72 million, investors do need to be aware that this company is very much at the emerging end of the market,” he says.
More articles from this week’s newsletter
Share price, market capitalisation and price/earnings ratios at August 5, 2011
Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au.You should seek professional advice before making any investment decisions.