Three great British tech stocks to buy now
A US recovery would be good news for British tech stocks, says professional stock picker Fraser Mackersie. Here, he tips three stocks set to profit.
Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Fraser Mackersie, co-manager of the Unicorn Free Spirit Fund.
The UK economy has had the benefit of low interest rates, a relatively weak exchange rate and stable government spending for the past three years. Even with this favourable background, the economy has shown only limited recovery and in the past 12 months has stalled completely. The scope for improvement in 2013 is very limited. So, hopes for next year rest on the performance of the US economy.
The early refinancing of the US banking system seems to have brought about a modest recovery in the housing market which is now feeding through to consumer and business confidence.
This trend could well be reinforced as new gas and oil reserves begin to help an energy-intensive economy. US politicians may also find enough common ground on budget measures to enable higher growth and energy taxes to at least stabilise the US deficit. This could create some rewarding opportunities for investors in the UK technology sector.
Many companies in this field have strong ties with the US economy. Improving sales would gain an additional boost if, as seems likely, higher US growth is reflected in a stronger US dollar. Moreover, many US corporations are cash-rich, so we may well see more acquisitions of UK-based technology companies.
These firms are typically valued cheaply compared with their US counterparts so there is scope for some very attractive bids. Three companies stand out.
My first choice is DotDigital (LSE: DOTD), an Aim-listed software company. This firm enables organisations to create professional email marketing content in a few simple steps using the internally developed DotMailer product. Initially targeted at SMEs (small and medium-sized enterprises), the company is now gaining increasing traction with larger organisations (including a subsidiary of eBay).
DotDigital is profitable, cash-generative andable to fund organic growth using its own profits and cash flows. With cash on the balance sheet, attractive levels of recurring revenue and a number of interesting growth opportunities, the company is well-placed heading into the New Year.
My next tip is Lo-Q (LSE: LOQ), another Aim-listed stock. The firm's product is virtual queuing technology, for which North America is the target market (accounting for 94% of revenue in the year to 30/10/11). The firm's patented products allow theme-park visitors to queue virtually for popular attractions and turn up when it is their time to ride.
The company is now commercialising its large patent portfolio and diversifying the business through a number of new initiatives. These include applications in ticketing and contactless payments. A recently signed partnership agreement will also see the technology promoted in rapidly growing Asia.
My final tip is Perform Group (LSE: PER), a sports media business which acquires and distributes digital broadcast rights for a large variety of global events. Revenue comes from distributing these rights in a number of different digital formats. Customers range from bookmakers, who use the live streams to provide online in-play betting, to individual subscribers.
Advertising revenue is also playing an ever-bigger role in the growth of the business as advertisers capitalise on the rapid growth in online video content. Recent deals with Gannett, a media company, and the American NFL football league highlight the big opportunities in North America.