Long-term outlook

The aim of SMT is to be an “actively managed, low-cost investment trust, investing in a high-conviction, global portfolio of companies with the aim of maximising its total return to shareholders over the long term”, according to the April 2021 factsheet. And long term is key here. As such, I have no concerns with the short-term volatility it may currently be experiencing. The trust measures performance over a five-year period. Being a long-term investor, I’m happy with that. And I only have to look at the 100% share price rise in 2020 to see the returns SMT can offer.

So why do I like it for the long term? When looking at the top holdings, I see huge potential. As of April 2021, the portfolio included Tencent, NIO, and Amazon. These companies open avenues for me to the growing tech industry. With the current tech sell-off, I see the exposure SMT can provide to this sector as a good way to diversify my portfolio further, for a good price.

And I like the way the managers think ahead. SMT took the decision to halve its position in Tesla earlier this year, banking a profit before the tech sell-off. Moves like this give me confidence for the future active management of the portfolio.

Risks with Scottish Mortgage Investment Trust

With the above said, I’m aware of the potential risks that come with SMT. First, fund manager James Anderson intends to step down in April 2022. Having spearheaded the rise of the trust, this could arguably leave future performance in question. After all, Anderson was key in the decision to invest in Tesla back in 2013 when the stock was trading at $6. Could his keen eye be a loss in the years ahead?

To add to this, the operation’s large exposure to tech can also be a risk in itself as the current tech sell-off (which my fellow Fool Dylan Hood explained very well) shows. With investor confidence continuing to fall, SMT’s share price could too.

My verdict

The news regarding James Anderson may be a blow for investors. He has delivered incredible returns over his time as fund manager. On top of this, the trust has been volatile recently.

However, as a long-term investor, I’m not put off by this. SMT has a solid track record and I see the current share price as a good opportunity to buy.

The all-time high in February may only be the beginning of what investors could see further down the line. That’s why I’m buying more of the shares now.

The post Why I’m still buying Scottish Mortgage Investment Trust appeared first on The Motley Fool UK.

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Charlie Keough owns shares in Scottish Mortgage Investment Trust and NIO. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon, NIO Inc., and Tesla. The Motley Fool UK has recommended Illumina and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 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.

“Very strong performance”

By contrast to so many UK-listed stocks, Kainos said it had “delivered a very strong performance” during the coronavirus pandemic. For a company that specialises in enabling other businesses to ‘digitally transform’, that’s not particularly surprising. However, the numbers are really quite something. 

Revenue climbed 23% to £107.2m over the six months to the end of September. Positively, the vast majority of this was organic, highlighting how Kainos isn’t dependent on acquisitions for growth.

Broken down, Digital Services remains the biggest contributor to the top line. Here, revenue rose 16% to £71.4m, helped by the company’s partnership with the UK government in the latter’s digital transformation programme. This has included supporting the NHS as it battles Covid-19.

Elsewhere, revenue from its Workday Practice area jumped 41% to £35.8m as the Belfast-based business continues to support customers such as Warner Music and Blackberry. 

All told, pre-tax profits doubled to £24m compared to the same period in 2019!

Now for the bad news…

Is this FTSE 250 stock too expensive?

Shares in Kainos already traded at 41 times forecast earnings before this morning’s report was released. That’s an eye-watering valuation for any company at the best of times. It’s even loftier when markets face the toxic trio of Brexit, lockdowns, and longer-term pandemic-related economic pain.

Notwithstanding, there are a few reasons why I think this company could still make money for me if I were to buy. For one, there’s the near-term outlook. Thanks to a “robust pipeline” and “significant contracted backlog,” Kainos is upbeat on trading over the rest of the current financial year.

Second, the £1.5bn-cap still has lots of room to grow. Indeed, CEO Brendan Mooney believes the coronavirus will “continue to accelerate the already strong demand from customers for digital transformation and Workday services as organisations adapt to the changes that the pandemic has brought.” 

The fact that Kainos is recruiting more people is certainly a positive sign. Headcount was up 11% on the previous year, even after a temporary pause following the coronavirus outbreak. What a contrast to other FTSE 250 stocks! 

Although most definitely not income-focused, it’s also encouraging to note the rise in dividends paid out to holders.

Today, the FTSE 250 constituent announced a stonking 83% increase to its interim dividend to 6.4p per share. In addition to this, a special dividend of 6.7p per share was also declared. If I owned the stock, I’d take this as a sign of just how bullish Kainos is on its future. 

Finally, Kainos has many of the hallmarks of a quality operator — exactly what I look for. As well as being highly-cash generative, the company has £62.5m in net cash. As you might expect from a business providing software solutions, operating margins and returns on capital employed (ROCE) are also consistently high. 

Bottom line

With its vertigo-inducing price tag, Kainos will be anathema to value investors. Given the choice over buying a beaten-up, debt-laden straggler and a solid growth share that can be held for years, I know which would get my vote. 

The post Profits double at this FTSE 250 tech share. I think there could be more to come! appeared first on The Motley Fool UK.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Kainos. 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.

Luckily, I have more than two decades until I need to retire and the country’s robust financial markets offer plenty of opportunities to expand my wealth over time. With that in mind, here’s how I’d invest my money today to achieve a 100-fold return within 20 years. 

The strategy

Multiplying an investment 100 times over is unimaginably difficult. In fact, most investments never even crack the tenfold threshold. So, how do I hope to achieve my admittedly ambitious target? By focusing on steady growth stocks with long-term prospects. 

I’ll need a company with high margins, a durable competitive advantage and an annual growth rate of over 25.9% to reach my target within 20 years. I also need to be careful to avoid volatile or unpredictable businesses that can leave me with heavy losses over this period. 

My best bet is on the seemingly boring sector of enterprise software. These companies are not as flashy as the young tech start-ups, but they do have patented technology that companies rely on and are willing to pay hefty subscriptions for over many years. Here are my top two picks.

Kainos Group

Belfast-based software company Kainos Group (LSE:KNOS) has a track record of stunning performance. Between listing in July 2015 and July 2019, the stock quadrupled. That implies an annual growth rate of roughly 41.4%. 

However, the stock has plunged since July and is now down by roughly a quarter. In my opinion, that opens up a significant buying opportunity for long-term investors. 

The company’s clientele includes government institutions such as the NHS, the Cabinet Office, Home Office, DVLA and Department for Transport, along with major corporations like Prudential, HP, Netflix and Diageo.

Kainos has a 15.4% net margin, a backlog of orders on the book and a robust balance sheet. Net profit and revenue have both compounded at a rate greater than 26% since 2013. It’s also a robust dividend stock, with a yield of 1.85% and dividend coverage of 1.5.  

It fits the profile of a steadily expanding critical software provider perfectly, which is why it makes my list. 

Softcat

Another similar compound growth machine is Softcat (LSE: SCT). The Marlow-based technology company has been around since the 1990s, but only listed on the stock market in 2015. Since then, the shares have more than tripled in value. 

The company’s software solutions allow companies to manage their digital work spaces, maintain their data in the cloud, protect their operations from cyber attacks and analyse data on their business operations to inform critical decisions. 

It’s a lucrative business with plenty of clients. More than half of the company’s clients are small and medium-sized businesses that have come to rely on its services. But the company also serves public sector institutions such as Dumfries & Galloway Council and major corporations like McLaren. 

Customer satisfaction has been reported at 97%, while the company has just reported 52 consecutive quarters of year-on-year growth. Revenue, gross profit and operating profit expanded by between 29% and 36% over the past year alone. 

Bottom line

These two growth stocks should be enough to multiply my wealth many times over, if not make me a millionaire in two decades. 

The post How I’d invest £10K today for £1m in 20 years appeared first on The Motley Fool UK.

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VisheshR has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Netflix. The Motley Fool UK has recommended Diageo, Kainos, Prudential, and Softcat. 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.

Whether you view short sellers as an integral part of a healthy capital market or opportunistic parasites, the accusations have likely done interested investors on the outside looking in a favour. IQE’s once astronomical valuation has now come down to a more palatable 38 times forward earnings. But this valuation still prices in several years of expected growth, which is always risky with fast-moving tech firms.

An additional worry is that the short sellers’ reports do raise valid questions about the group’s corporate governance structure. Now these could be nothing more than growing pains of a previously tiny and obscure company that is now unexpectedly in the limelight. But I’ve seen too many AIM-listed stocks wilt under poor corporate governance standards to invest in IQE right now due to questions surrounding its relationship with joint ventures and accounting practices.

Another issue giving me pause is the group’s rapid expansion. In November, it issued shares representing 9.9% of its previously issued capital to raise £95m for expansion purposes including a significant increase in the volume of machinery at its new foundry. While the group’s sales are currently rising at a brisk pace and it’s good to see management investing to meet demand anticipated several years out, there’s always the risk that changes in the industry could see the company saddled with excess capacity.  

Likewise, while IQE supplies a series of chip makers rather than just one or two, its sales are still fairly concentrated. The industry is also undergoing rapid changes with a series of acquisitions, business model shakeups and customers squeezing suppliers’ margins. As a small player in the wider industry, these changes risk buffeting IQE’s fortunes, which together with short sellers’ concerns make the company’s valuation too high for me to invest in the stock right now.

This recent market entrant makes a splash 

I’m much more interested in Alfa Financial Software (LSE: ALFA), which designs and supplies software for the asset financing sector. Like IQE, Alfa trades at a lofty valuation of 38 times forward earnings. But I believe the sticky nature of its product — which is used by financial institutions such as RBS and carmakers such as Mercedes-Benz North America — and rapid growth warrant such a premium.

In the half year to June, the group’s sales leapt 29% year-on-year in constant currency terms to £45.1m as it landed two new contracts, completed three software implementation programmes, and increased recurring revenue streams from existing clients. Looking forward, there’s still plenty of room to grow as its software is in high demand from a range of lenders looking for an easy-to-use, unified programme to keep track of and service loans.

With the founder-led management team investing in building up the company’s developer ranks, the group’s large sales pipeline should be quickly converted into cold hard cash. And with a large net cash position, high profitability and plenty of room to grow, I think Alfa could be a great long-term holding. 

The post Why I’d sell IQE plc in favour of this hidden tech gem appeared first on The Motley Fool UK.

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Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.