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Ken Wotton speaks to Investment Week about what he looks for in technology stocks

Investors in technology stocks have had mixed experiences in recent years with many people chasing momentum stocks, rather than focusing on fundamentals.

At Livingbridge we believe it is not about spotting the next unicorn, instead we look for sustainable and profitable growth at a reasonable price. We’re interested in businesses with a niche focus that can tap into essential areas and specific trends, rather than high risk potential disruptors.

For instance, an issue ever increasing in prominence is cyber security. It is highly complex and constantly changing. A data breach can be costly and damaging to any business, no matter how large or small. Rather than invest in companies offering specific ‘black box’ products which can be quickly superseded, we are interested in those businesses offering expertise and support to help their customers navigate this complex area and ensure they are protected. We like stocks offering outsourced IT services that cannot be efficiently delivered in-house, but are nevertheless business critical.

The ever increasing IT demands facing companies means more are outsourcing their business needs to managed IT providers. In this context we look for well managed businesses that differentiate themselves through excellent customer service or by offering deep knowledge in a particular area.

The technology stocks most likely to succeed over the coming years are those providing consultancy, support and managed services that allow customers to focus on their core business. These companies are better placed to generate profits, have strong balance sheets and sustainable growth which can support consistent long-term shareholder returns.

Looking ahead, we believe overall, technology service providers will continue to grow their earnings over the next few years due to increased demand for their services and the fact they are less exposed to macro-economic and geopolitical uncertainty. This de-risks the investment case and means the outcome is more within the control of the management team and their ability to execute against their agreed strategy.

Bull points

  • Technology increasingly underpins the products and services of most businesses creating demand for specialist help to manage cost and complexity
  • Management quality, service focus and genuine expertise can underpin successful long-term growth for IT services businesses

Bear points

  • Excessive reliance on specific products can rapidly undermine growth if technology shifts
  • Valuations can become excessive for the “next big thing” as stocks gather momentum and underplay the risks

 

This article was originally published by Investment Week, 5th October 2017.