Next month investors will be treated to the annual extravaganza of “best stocks to buy for 2018” advisory articles. The predictions from stockmarket experts can be useful tools for developing watch lists of investment possibilities. However, sage investors temper exuberant expectations, recalling the famous adage accredited to Danish physicist Niels Bohr:
• “It is very hard to predict, especially the future.”
Now that the future is history, reviewing an article appearing on 27 December 2016 in the Australian Financial Review entitled Your guide to shares in 2017: technology, healthcare, resources allows us to assess some of those prior predictions.
A UBS analyst identified three stocks in the Technology Sector as “top picks”, along with another three expected to perform well and two laggards the analyst community saw as having “bounce back potential.”
The top picks were:
Top Australian Brokers
• Wisetech Global Limited (WTC)
• Technology One Limited (TNE)
• Nextdc Limited (NXT)
The additional picks expected to perform were:
• Integrated Research Limited (IRI)
• Superloop Limited (SLC)
• 4DS Memory Limited (4DS)
The two picks with the potential to rebound were:
• Catapult Group International Limited (CAT)
• Aconex Limited (ACX)
So how have these stocks performed as we near the end of Calendar Year 2017? The following table lists year over year share price performance along with some historical performance measures and earnings forecast where applicable.
Overall, four of the eight stocks mentioned in the article have seen share price increases exceeding 50%, with Wisetech Global the clear leader. 4DS Memory and Aconex have seen double digit share price increases while Technology One has remained essentially flat year over year. Only two of the companies – Catapult and Superloop – have seen declining share prices.
Four of the stocks are newer to the ASX, with two listing in December of 2014 – Aconex and Catapult – while Superloop listed in 2015 and the most recent entry was Wisetech, listing in April of 2016.
The companies that have been trading for five years or more have solid track records of shareholder return, along with double digit two-year earnings growth forecasts.
Wisetech Global has been on fire since closing its first day trading at $3.89. The issue price was $3.35, with some analysts at the time claiming the company was overvalued. The share price has risen roughly 200% since.
The company’s claim to fame is CargoWise One, a single cloud-based software platform enhancing the productivity of logistics businesses. The platform is flexible enough to serve industry specific needs. Wisetech began here in Australia back in 1994 and now has 7,000 customers in 125 countries around the world and remains under the leadership of its entrepreneurial founder.
The company’s FY 2016 Financials reported $102.8 million in revenue with a net profit of $2.2 million. For FY 2017 revenue rose to $153.8 million while profit exploded to $31.9 million, an astonishing 1350% increase.
Nextdc began trading on the ASX in December of 2010. Investors who took an early chance on this data centre builder and operator have been handsomely rewarded.
Building new data centres and acquiring existing centres is a capital-intensive endeavor and Nextdc has plans to add three new centres in the coming year, announced in the Half Year 2017 Financial Results in February. Management stated the development costs could come in excess of $250 million. Investors expressed confidence in the strength of Nextdc’s balance sheet, impressed by the dramatic financial improvements buoyed by past expansion. For the Half Year revenue was up 39% while profit roared back from $600k to $1.8 million. Full Year 2017 Financial Results reported in August maintained the dramatic improvements. Revenue increased 30.7% while profit improved 21.2%.
Investors concerned about increasing capital expenditures at Nextdc might be relieved to learn that analysts at Citi raised its price target to $6.03 in anticipation of the company’s expansion. Nextdc is in a takeover battle for Retail Investment Trust APDC (Australia Pacific Data Centres), with Nextdc being the trust’s principal tenant. As of this writing, real estate investment and funds management group Capital Group (TGP) bested the NXT offer of $1.87, offering $1.95. APDC is now recommending shareholders accept the offer.
Integrated Research is a software company serving “mission critical” businesses where an array of information technology infrastructure systems is essential to the survival of a business. Examples include airlines, telecommunication operators, financial institutions, and automotive companies.
The company’s core offering is Prognosis, an integrated platform providing performance management, diagnostics and insight for business-critical systems such as payments, communication, and related information technology infrastructure. The company has been in business since 1988, with its founder remaining as a shareholder. With more than half of its revenue coming from the US, Integrated Research has benefited from the declining dollar. Among its more than 1,000 customers across 75 countries the company claims are some of the world’s largest airlines, banks, and telecommunication companies. In the US, 125 companies in the Fortune 500 are customers, including all the top ten US banks.
Integrated Research pays a fully franked dividend with a current yield of 1.6%. Dividends per share for FY 2017 came in at $0.065 and are forecasted to increase to $0.105 by FY 2019. The company has grown both revenue and profit in each of the last three years, with revenues increasing 8% between FY 2016 and FY 2017 along with a 16% profit increase. Over the past decade, the share price has risen more than 800%.
Technology One is the only one of the top picks for 2017 that has disappointed investors, although the company had turned in solid performances going into this year. Over five years the stock price is still up close to 300% despite the 2017 downturn.
The company bills itself as Australia’s largest enterprise software and consulting company, with more than 1,000 customers; offices in six countries; and 30 years of business experience. Software offerings include:
• TechnologyOne Financials,
• TechnologyOne Enterprise Asset Management,
• TechnologyOne Supply Chain,
• TechnologyOne Human Resource and Payroll,
• TechnologyOne Property and Rating,
• TechnologyOne Stakeholder Management and
• TechnologyOne Student Management.
Along with implementation and other consulting services, Technology One provides custom software development for large applications.
Going into the company’s Half Year 2017 Financial Results announcement in late May the stock price was moving upward and remained so following the solid report. By August the price was in decline, perhaps due to its lofty Price to Earnings (P/E) ratio around 40.7, and went into full retreat on 3 October when management shocked the market with a profit downgrade from previous projections of 10% to 15% growth to between 7% and 9%. Management attributed the downgrade to the declines in the company’s software consulting operations.
Investors may have recovered from the shock as the share price has been creeping upward, rising about 16% since the announcement. Technology One pays a fully franked dividend with a current yield of 1.6% and 2-year forecasted dividend growth of 19.9%.
The smallest company in the table by market cap is start-up 4DS Memory, a promising stock with as yet no major analyst coverage. Investors piled in to the stock in the early days but have grown ice-cold since, although some appear to be returning over the last three months.
The promise of this fledgling company is a revolutionary patented Interface Switching ReRAM (Resistive random-access memory), with the potential to replace flash memory. Given that 90% of the data floating around the planet today has been created in the last two years and the expected explosion in storage needs from more and more mobile devices, digital content, cloud-based services, and the Internet of Things, this tiny company is one to watch.
Australia-based research firm TMT Analytics has a BUY rating on the stock with a $0.12 price target. 4DS memory’s research and development facility is located in Silicon Valley in the US.
Aconex provides cloud-based software solutions for the construction industry and vaulted out of the gate following its IPO in 2014, rising to a high of $8.29 by mid-2016. Those days are long gone as the company now graces the Top 30 Short List, although the short interest is on the decline and the share price is rising.
The company provides software for construction projects allowing direct involvement and cross communication of all parties involved. Aconex may be a victim of its own share price success as investors flocked to the stock upon listing, only to begin abandoning the company once the perception the company was overvalued took hold.
Catapult Group International is another former market darling fallen on tough times. The company came on the ASX in late 2014 at $0.55 and within 18 months climbed to $4.05. The company provides wearable athletic performance monitoring and measuring devices used by a veritable “who’s who” of top sports teams around the world.
While the company seems to have no trouble selling its products – revenues rose 53% between FY 2015 and 2016 and 249% between FY 2016 and 2017 – Catapult posted three successive losses, plunging from an FY 2015 loss of $4.3 million to a deeper hole of $13.6 million in FY 2017.
Superloop came to the ASX in June of 2015 amidst high hopes for its dark fibre telecommunications infrastructure and its direct focus on Asia. Like Catapult Superloop is growing revenue but has yet to show a profit.