When you think of the UK stock market, technology probably isn’t the first sector that comes to mind. After all, the FTSE 100 index has less than 1% exposure to the tech sector at present, compared to 23% for the S&P 500.
Yet believe it or not, across the whole market capitalisation spectrum, there are nearly 200 companies listed in the UK technology sector. This means there are plenty of opportunities for astute investors. With that in mind, here’s a look at what I consider to be some of the best related stocks to invest in.
In the large-cap space, one of my top picks is FTSE 100 legend Sage, which specialises in cloud-based accounting and payroll solutions. It’s delivered amazing returns for investors over the years, but I believe there’s more growth to come. According to Orbis Research, the global cloud accounting market is set to grow at a compound annual growth rate (CAGR) of around 8.6% between now and 2024.
Another FTSE 100 tech stock I like is Rightmove. It’s an incredibly profitable company (three-year average return on equity of 1,328%) with a strong competitive advantage in the form of a dominant market position.
Ocado – which specialises in e-commerce automation solutions – is another FTSE 100 tech stock that is worth mentioning. However, it’s not profitable, so I see it as higher risk.
In the mid-cap area, one of my top technology picks is Softcat, a company that provides IT solutions (cloud, networking, security, etc) to corporate and public organisations. It’s grown at a strong rate since its Initial Public Offering (IPO) in 2015 (sales rose 24% last year). I see the potential for plenty more growth as businesses can’t afford to ignore IT today if they want to remain competitive.
Other tech companies I like in the mid-cap space include IT infrastructure outfit Computercenter, identity specialist GB Group, and cybersecurity group Avast. All three are profitable and have generated strong growth in recent years. Robotic process automation (RPA) specialist Blue Prism is also worth a mention here but, like Ocado, it’s not profitable, which means it’s a higher-risk play.
In the small-cap area of the market, there’s an abundance of innovative tech stocks that look interesting. If your goal is to generate big capital gains, this area of the market offers the most opportunities, in my view.
One small-cap tech stock I like is dotdigital. It’s an under-the-radar company that specialises in digital marketing solutions. Just recently, the company told investors it’s in its strongest position to date and that the “market opportunity remains substantial.”
Another exciting tech stock I believe is worth checking out is Keywords Studios. It provides technical and creative services to the video game industry and works with nearly all of the world’s leading video game developers. Given the huge growth of the gaming industry, I believe KWS has substantial potential.
Finally, I also like First Derivatives. It’s a FinTech/big data specialist that helps financial institutions process their data more effectively. Given that they say data is the new oil, I see big potential here.
Of course, given their potential, many of the companies I’ve listed above trade at lofty valuations. This means they can be volatile. As always, it’s important to do your own research and understand the risks involved before investing.
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Edward Sheldon owns shares in Sage, Rightmove, GB Group, Softcat, dotdigital, Keywords Studios and First Derivatives. The Motley Fool UK has recommended dotDigital Group, Keywords Studios, Softcat, Rightmove, and Sage Group. 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.