Around two months ago, I wrote that FTSE 100 stock Sage (LSE: SGE) could be poised to move higher. At the time, the accounting and payroll software company had just seen some large stock purchases from company directors and I viewed this insider buying as very bullish.
Fast forward to today, and the stock is up by more than 10%. That’s an impressive performance, especially when one considers that the FTSE 100 index has actually gone backwards since then.
I don’t think it’s too late for investors to consider buying Sage shares today though. I believe that they can keep rising from here. However, if the stock keeps rising, it could get quite expensive, so I think investors need to act quickly if they’re looking to snap it up.
Still bullish?
I’m still very optimistic about this Footsie stock. There are several reasons why.
One is that the company just posted great results for the six-month period ended 31 March and raised its guidance for the full financial year.
It now expects full-year organic recurring revenue growth of around 11% (versus previous guidance of 9.4%) after it saw a strong uptake of cloud services in the first half of its financial year.
On the back of this better-than-expected guidance, analysts have been raising their earnings per share (EPS) forecasts for the year. Positive EPS revisions typically push a company’s share price higher.
A second reason I’m bullish is that the company offers exposure to one of the world’s hottest investment themes – generative artificial intelligence (AI).
In the company’s H1 results, CEO Steve Hare (who was one of the insiders who recently bought stock) said that he was excited about the possibilities of generative AI.
“We already have significant AI built into our products,” said Hare. “But this next generation of generative AI is very exciting in terms of the ability for us to deliver more productivity to our customers and also benefit from it ourselves within Sage.”
Finally, the share price action looks really interesting to me. For over five years now, the shares have been stuck in a trading range. They’ve basically been consolidating the strong gains generated between 2010 and 2018.
The shares now look like they want to break out of this range. There’s no guarantee they will break out, of course. For example, a wobble across the FTSE 100 or a shift in sentiment towards tech stocks could send them lower.
However, given the strong guidance from Sage and the recent interest in tech/AI stocks, I think there’s a decent chance they will. And if they do, the rise could be explosive given the long consolidation period.
Why I’d buy now
At today’s price, Sage shares trade at around 25 times next year’s earnings forecast.
That’s considerably higher than the average FTSE 100 P/E ratio, which adds risk. However, I don’t think it’s unreasonable.
Sage has strong competitive advantages, recurring revenues, and an excellent dividend history. So, it’s worth a premium to the market, in my view.
But I wouldn’t want to pay a multiple much higher than 25 for it. The higher the multiple, the less ‘margin of safety’.
That’s why I think investors need to act quickly on their research if they might want to buy. I still like the risk/reward set-up.
