When I took over the Red Hot Penny Shares newsletter, I told subscribers about my investment style. In essence, I like growth shares. Whenever I meet a company the main question I want answering is: “where is the growth coming from?”
All the other things I do are important – the number crunching, the valuation work, meeting management. But these quickly lose their relevance for me if the company can’t grow.
As investors, we spend a lot of time fretting about ‘the market’. It’s a source of fascination and, of course, it’s important in the short term that we stay on the right side of it as much as we can.
But what really makes you money in the long term is to identify proper growth stocks and to simply stick with them. And where is the best place to look for great growth stocks right now? The short answer is the technology sector. Let’s take a topical example.
‘The growth will bail you out’
Last week, Google broke the $1,000 share price barrier, valuing the company at $333bn. That’s not bad for a business founded a mere 15 years ago. In its nine years as a listed company, it has traded on very high valuations as well as its current mark, which is much closer to an average rating.
The shares also fell by 60% during the financial crisis even though Google’s earnings per share (EPS) held steady – a good example of how price and company performance can become disconnected in the short run.
Yet if you bought Google at those 2008 lows, you would have made close to four times your money. The company has carried on growing, with that EPS line trending onwards and upwards. And over time, the share price has followed.
Yes, of course, valuation is important – being careful not to overpay will have a huge bearing on your return. But even if you were careless and bought at the peak before that sickening fall in 2008, you would still have made a 33% return today. The growth has bailed you out.
Google is a great example of the dynamism and excitement of the tech sector. The US has a fabulous record of creating significant household-name companies with breathtaking regularity.
LinkedIn was founded in 2002 (market value $28bn), Facebook in 2004 (market value $130bn), Twitter in 2006 (IPO due shortly). And that’s just in social media. But what about UK-based investors – can our domestic tech sector capitalise on the opportunities available in this industry?
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The UK tech sector is absolutely thriving
We might not have the same size companies here that have emerged in the US, nor have those with the same public profile, but we aren’t doing too badly. KPMG published a study this week of the performance and outlook for the UK technology industry and it made for very positive reading.
Job creation has occurred at a faster pace than for the private sector as a whole, consistently outperforming over the last four years. Tech employment now exceeds one million out of the UK’s total workforce of 28 million.
Technology suffered less than many sectors in the downturn and has recovered faster. This year, output has accelerated sharply following a soft patch at the start of 2013.
And things are likely to continue in this vein. The KPMG study was conducted by Markit who produce the purchasing manager indices. These PMIs give an insight into the thinking of those responsible for spending company funds across the economy.
Within the tech sector, the PMI data reveals a +78% balance of optimists minus pessimists when managers were asked in June whether they expected their business activity to increase over the coming year.
Across the UK economy as a whole, the net balance was +51%. Both these figures are the highest recorded, but since the series only goes back to 2009, we shouldn’t get overly excited. What is worth emphasising though, is that technology has consistently recorded better readings than the average for the economy as a whole.
Unsurprisingly, the stock market has noticed. Over the last 12 months, the FTSE 350 Technology Sector is up 41% compared with a 15% gain for the All Share Index.
In fact tech has been in a rising trend relative to the overall market since the Spring of 2008, which ties in with the KPMG findings.
There are great stories behind this boom. I’ve pointed to ‘big data‘, the ‘internet of the things‘ and cloud computing as three obvious examples. And I’m targeting double or triple gains on my Red Hot stocks in this sector – I’ll tell you more about how you can get in on that in the coming weeks.
The point is that technology is finally coming of age as a great investment story in the UK.
Investors can often be a bit wary of tech after the debacle of the 1998-2000 TMT bubble.
The ‘bubble’ word is overused nowadays, but it was fully justified in that case. However, in contrast, today’s valuations are sensible, the fundamentals are positive and the opportunities are as great as ever. In fact, most of the stories that really excite me at the moment are found in the technology sector.
• This article is taken from our free twice-weekly small-cap investment email, The Penny Sleuth. Sign up to The Penny Sleuth here.
Information in The Penny Sleuth is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. The Penny Sleuth is an unregulated product published by Fleet Street Publications Ltd. Fleet Street Publications Ltd is authorised and regulated by the Financial Conduct Authority. FCA No 115234. http://www.fsa.gov.uk/register/home.do
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