Whenever investors think of technology stocks, there is usually talk of Silicon Valley and how appealing US tech firms are. After all, it’s the home of the likes of Google, Facebook, Twitter and many other companies that have dominated digital technology over the past two or three decades. However, for UK investors seeking to buy into what tends to be a fantastic growth sector and who wish to avoid buying US shares, it can often feel as though there is a lack of choice.
After all, tech companies make up just 1.2% of the FTSE 100 and 1.5% of the FTSE All-Share. Therefore, while there is a never-ending list of mining, oil and financial stocks from which to choose, tech companies are somewhat thin on the ground.
However, the ones that are listed here in the UK are often excellent businesses. For example, physical intellectual property designer ARM (LSE: ARM) has posted a rise in its bottom line in four of the last five years, growing at an annualised rate of 27% during the period. And further growth is being forecast, as the global demand for products such as smartphones continues to rise.
In the current year ARM is expected to increase its earnings by 69%, followed by further growth of 17% next year. This means that ARM’s bottom line is due to almost double between 2014 and 2016 which, for a relatively mature company, is superb performance and reflects just how successful, efficient and profitable ARM’s business model really is. Plus, with it trading on a price to earnings growth (PEG) ratio of 1.6, its shares seem to be reasonably priced, too.
Excellent income opportunity
Similarly, radio frequency engineer Laird (LSE: LRD) has also been profitable in four of the last five years, which shows that it is a relatively reliable performer. And, with earnings set to rise by 19% this year and by a further 11% next year, Laird is able to afford to push dividends higher.
In fact, they are forecast to be 10% greater in 2016 than they were in 2014 and this puts Laird on a forward yield of 3.7%. For a technology company trading on a PEG ratio of 1.4, this presents an excellent income opportunity.
Meanwhile, intellectual property specialist Imagination Technologies (LSE: IMG) may be set to have a tough year, but it is likely to bounce back next year. As such, its share price fall of 5% in 2015 should not be a major cause of concern for investors since it is most likely a response to the expected 12% fall in the company’s bottom line this year.
However, looking ahead to next year Imagination Technologies is forecast to return to profit growth for the first time in four years with a rise in earnings of 40%. This has the potential to turn investor sentiment on its head and push the company’s share price higher – especially since it trades on a PEG ratio of just 0.7.
It’s a similar story with Spirent (LSE: SPT) which is expected to post a fall in its bottom line of 20% this year. While disappointing, it is due to react by delivering a rise in earnings of 38% next year and, with a forward yield of 3.4%, it continues to be a viable income choice. In addition, dividends are well-covered at 1.6 times and this means that even if profit is volatile moving forward then Spirent should be able to increase shareholder payouts at a brisk pace.
So, while Spirent’s share price fall of 47% over the last five years is very disappointing, its future appears to be very bright – especially since it has a forward price to earnings (P/E) ratio of 17.9. Given its upbeat growth prospects, this seems to be a fair price to pay.
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Peter Stephens owns shares of Laird. The Motley Fool UK owns shares of Google, Facebook and Twitter. The Motley Fool UK owns shares of Imagination Technologies and has recommended ARM Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.