I’m considering these 2 high-growth stocks to buy as a technology investor

Our author thinks Kainos and Softcat could be two of Britain’s best tech investments. He thinks the risks in the valuations may not be as bad as they first seem.

| More on:

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The technology industry is one of the greatest places to invest when searching for high-growth opportunities. The British stock market has two real gems that I believe could be my next stocks to buy.

Kainos Group

Kainos Group (LSE:KNOS) is one of Britain’s most reputable technology firms. It is essentially a professional services company that helps clients to digitalise their workforce. It also notably helps with Workday solutions and products to assist in implementing these.

Over the past decade, Kainos shares have gained a total of 555% in price. That’s a compound annual growth rate of 23.4%, which is far higher than the FTSE 250‘s compound annual growth rate of 2.5% over the period.

I particularly like that the company is well-diversified across the Western world. While 65% of its revenue comes from the UK, a significant portion also comes from the US and Europe. This will help to protect the company somewhat from any local recessions.

However, I’ve noticed that Kainos is in the business of AI. I’m slightly concerned that while it’s enjoying high growth at the moment, in the future, this could change. Primarily, I think this because it is helping many of its customers implement AI. If the AI becomes more sophisticated, which is likely, there’s a chance these enterprises will need Kainos’ services less.

Softcat

Softcat (LSE:SCT) is one of Britain’s leading IT infrastructure and services providers. It offers software procurement and management, cybersecurity, and consulting and support, among other services.

Over the last decade, Softcat shares have grown around 512% in price. That’s a compound annual growth rate of 23.5%, which is just slightly lower than Kainos and also much higher than the broader FTSE 250.

Softcat derives all of its revenue from the UK, which makes it less geographically diversified than Kainos. However, Softcat has a broader operational scope, offering products and solutions in multiple technology domains.

There are always risks when investing, though. One that is crucial for Softcat to navigate is that it has a high client concentration, especially in the public sector. Changes in government policies, budget cuts, or political changes can affect these revenue streams significantly. That’s why Softcat has been cultivating strategic long-term relationships to secure future revenue based on two-way trust.

I consider technology investing to be wise

Many investment professionals consider the technology sector to be high-risk. Primarily, this is true because companies in this field tend to have much higher valuations. For example, Kainos has a price-to-earnings ratio of 31, and Softcat has a ratio of 30. In comparison, the FTSE 250 has a price-to-earnings ratio of roughly 13.

While this might sound bad on the surface, it needs to be put into context. Successful technology companies can trade at high valuations for long periods of time. That’s because the sentiment of investors around the shares is maintained and can even increase as everybody wants to get in on the action.

In my opinion, as long as I can choose my winners carefully, technology investing can be very successful. I think the field is in for a big growth period in the near future due to AI and robotics. That’s a big reason why both Kainos and Softcat are on my watchlist right now.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Oliver Rodzianko has no position in any of the shares mentioned. The Motley Fool UK has recommended Kainos Group Plc and Softcat Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

I reckon these 2 penny shares are hidden gems worth a closer look!

Some penny shares are well-known, whereas many others go under the radar, but that doesn’t necessarily mean they aren’t potentially…

Read more »

Investing Articles

Just released: our 3 best dividend-focused stocks to buy before August [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Investing Articles

2 FTSE 100 shares with blockbuster yields investors should consider buying

Our writer has noticed that these FTSE 100 shares offer mammoth dividend yields, and reckons investors should take a closer…

Read more »

Stack of British pound coins falling on list of share prices
Investing Articles

Down 36% and yielding 7.8%, is this FTSE 250 share a bargain?

Christopher Ruane looks at a FTSE 250 share with a sizeable dividend yield and a recent record of dividend growth.…

Read more »

Investing Articles

Is Barclays one of the FTSE 100’s best bargain stocks?

Right now, Barclays' shares are cheaper than those of FTSE 100 rival stocks Lloyds and NatWest. So should I buy…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

Is a takeover offer about to boost the Rentokil stock price, and should I buy?

The Rentokil share price is up 10% on takeover rumours. Is it a stock to buy or one to be…

Read more »

Investing Articles

Here’s my Rolls-Royce dividend forecast for 2024-27!

Our writer considers whether the Rolls-Royce dividend might be reinstated in coming years, based on financial performance and stated payout…

Read more »

Investing Articles

What would I do if Rolls-Royce shares plunged 50%? History suggests a big decline is coming

While Rolls-Royce shares have delivered massive outperformance in recent years, they also have a history of significant declines.

Read more »