Years after the excesses of the dot.com boom, the technology sector is throwing up some bargain shares.
The better the party, the worse the hang-over. The dot.com party was a good one. It saw technology shares rise to incredible valuations. The correspondingly bad hang-over has lasted for years.
That means it's time to go hunting for value amongst the weary party-goers.
Software is a sector dominated by behemoths. The most prominent is Microsoft
(NASDAQ: MSFT)
which sells two very lucrative products, Windows, the operating system, and Microsoft Office, the productivity suite. Another is Oracle
(NASDAQ: ORCL)
which produces a database that is untouched by rivals. German-based SAP dominates business software. All these companies are worth keeping an eye on as their market strength could make them good long-term investments. Their valuations looked stretched at the moment, however.
You can also find companies making niche and sometimes, cutting edge, products. One such is GB Group
(LSE: GBG)
which has developed an identification system with BT
(LSE: BT.A)
called URU. Another is Autonomy
(LSE: AU.)
which sells software to search unstructured information.
Some other smaller software companies target specific industries. These include Financial Objects
(LSE: FIO)
, which makes software for the finance industry, and Bond International Software
(LSE: BDI)
which supplies the recruitment industry.
None of these companies attract me at the moment, either because their shares look expensive, or because I worry about threats the companies face from each other and from changes in the industry.
One threat to profitability is software that is given away. This includes 'free' or 'open source' software, such as Linux and OpenOffice. It also includes web-based software that can be used for very low cost through a web browser. Even a giant like Microsoft has difficulty competing with 'free'.
Complex, specialist software such as computer-aided design and computer-aided manufacturing, the so-called CAD/CAM sector, should be immune to this threat.
A dominant maker of CAD/CAM software is Dassault Systemes
(NASDAQ: DASTY)
. Its flagship product is the life-cycle management software, CATIA. On a price-earnings ratio of 28, its valuation looks lofty.
Listed in London is Delcam
(LSE: DLC)
, which makes software for tool design amongst other things. Delcam shows steady profit growth and good cash-flow. At today's price of 324.5p it has a forecast price-earnings ratio of only 9.3.
However, my favourite at the moment is Planit Holdings
(LSE: PLN)
. It specialises in software for the wood-working industry. At a price of 25.5p, it is on a forward price-earnings ratio of only 7.5 and has a price-to-sales ratio of 0.85. This is despite the fact that last week, it announced that it had entered talks with a possible buyer of the company.
Out-of-favour sectors are often a good place to look for value. The software sector is, at last, producing some bargains.
Paul owns shares in Planit Holdings.
Software companies were recently considered by Maynard Paton in Champion Shares. Why not sign up for a free trial to see what his latest tip is?
