When it comes to tech shares, most people think of US giants such as Amazon, Microsoft, Google (Alphabet) or Apple. While understandable, this somewhat implies there’s a shortage of high-quality, tech-related companies in the UK to invest in. I beg to differ.
Today, I’m highlighting two examples I believe are likely to make their owners considerably richer, so long as they’re prepared to buy and hold.
FTSE 250 constituent Spirent (LSE: SPT) provides communications testing and connectivity kit to more than 1,500 customers around the globe in sectors as diverse as defence, healthcare, and financial services. It’s a leader in what it does and, right now, business is good.
Earlier this month, the company reported a “strong” performance over the first half of the year, despite some impact from the coronavirus. Order intake and revenue were up 6% and 7% respectively. A “material increase” in adjusted operating profit from $20.7m last year to $39.5m in 2020 was also booked. Cue a sharp rise in Spirent’s share price.
At 27 times earnings, this company’s now far from cheap. Then again, great stocks are rarely without friends for long. Indicatively, the company ticks the boxes for rising margins and returns on capital. It’s in solid financial shape with oodles of cash on the balance sheet. Although unlikely to attract income hunters, the 12% hike to the interim dividend also suggests confidence on the part of management.
By far, the most interesting part of the investment case for me is the company’s exposure to the 5G market. The fact that many organisations will turn to Spirent for support when it comes to deploying infrastructure and related equipment makes me think those buying this tech share now could be richly rewarded later down the line.
Booming tech share
Fellow FTSE 250 member Kainos (LSE: KNOS) is another stock worth backing, in my view. The IT consulting and software solutions provider is ideally placed to take advantage of a growing demand for ‘digital transformations’ as a result of the coronavirus pandemic.
Reflecting the recent boom in business, Kainos now expects full-year revenue will come in “well ahead” of previous expectations. Adjusted profit will also be “substantially ahead” of forecasts, thanks to demand from its near-400 customers around the world.
Another bit of good news was the 6.7p per share special dividend. This goes some way to making up for the lack of final payout from the previous year (which coincided with the coronavirus outbreak). The cherry on the cake was the announcement that cash returns would now carry on as usual.
Naturally, all this hasn’t gone unnoticed by investors. Having soared 130% since March’s market crash, Kainos’s shares now sit on a valuation of 51 times forecast earnings. It may be that they now pause for breath. After all, the company still can’t estimate the impact Covid-19 will have on its customers.
Like Spirent, however, Kainos has all the things I look for in a ‘buy and hold’ investment. Earnings are nicely diversified by customer and geography. Returns on capital employed are consistently high too. At the time of its update, the firm also held cash of more than £62m and zero debt.
All told, I think Kainos is one to tuck away for a few years. Should markets crash again, I’ll be backing up the truck.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Paul Summers has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Alphabet (A shares), Amazon, Apple, and Microsoft. The Motley Fool UK has recommended Kainos and recommends the following options: long January 2021 $85 calls on Microsoft, short January 2021 $115 calls on Microsoft, short January 2022 $1940 calls on Amazon, and long January 2022 $1920 calls on Amazon. 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.