This year has seen a massive rally in UK tech stocks, with some mirroring the big gains seen in the US market.
I’m not keen on paying over the odds for my shares, so I’ve been hunting for bargain UK tech stocks that still look cheap enough to offer the potential for big gains. I’ve unearthed three tech stocks I want to own.
Too cheap to ignore?
Shares in price comparison website Moneysupermarket.com Group (LSE: MONY) have lagged the market this year, due to a pandemic-related slowdown in sales. However, although earnings are expected to slump in 2020, analysts expect a strong recovery in 2021.
Is that realistic? I think so. The main areas where Moneysupermarket has suffered this year have been travel insurance and personal finance. No one has been travelling outside the UK and banks have been cutting bank on new loans, due to concerns about the economy.
I expect both of these headwinds to ease by next summer. Meanwhile, the firm is targeting growth opportunities such as mortgage lending and providing its services to commercial partners, such as banks.
Looking ahead, MONY shares trade on around 16 times 2021 forecast earnings, with a dividend yield of 4.6%. Moneysupermarket has no debt and delivers profits margins of about 30%. I think this UK tech stock is too cheap and I’ve been buying it for my portfolio.
I’d back owner management
IT services group FDM Holdings (LSE: FDM) provides business and technical experts to work on client sites. These are called ‘Mounties’ by the firm. To give you an idea of scale, the company had 3,721 Mounties placed with clients at the end of September.
One of the things I like about this business is it’s run by owner management. CEO Rod Flavell and chief operating office Sheila Flavell own around 15% of the business between them. That gives them a collective stake worth around £170m. I reckon they should be motivated to deliver strong shareholder returns.
FDM is a profitable business too. The group’s operating profit margin has averaged more than 18% in recent years and cash generation is good. Although last year’s dividend was cut, analysts expect a payout of 34p per share this year, giving a useful 3.3% yield.
Broker forecasts suggest a return to earnings growth in 2021. I’m happy to keep holding and buying FDM shares.
The next UK tech stock I’ll buy?
The final company I want to look at is FTSE 100 accounting software group Sage (LSE: SGE). It disappointed investors recently when it warned profits could dip in 2021.
Sage’s share price has fallen more than 15% over the last month. That’s left the shares trading at a level last seen when the stock market crashed in March.
I think this negative sentiment has gone too far. Sage is continuing to make good progress converting customers to its cloud-based subscription services. This is limiting growth today. But, in future years, I expect the firm’s recurring revenue to support reliable, growing profits.
The company is also increasing its spending on new products and services. For a tech business, I generally see that as a good thing. Anyone who doesn’t innovate gets left behind.
Sage has a long track record of high profit margins and strong shareholder returns. I’m hoping to use the current lull to add some Sage stock to spice up my portfolio.
Roland Head owns shares of FDM Group and Moneysupermarket.com. The Motley Fool UK has recommended Moneysupermarket.com 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.