3 Decent Picks in the Footsie's Least-Loved Sector
LONDON -- Think of America's technology-rich Nasdaq market, and blockbuster stocks such as Microsoft, Apple, and Google, quickly come to mind.
Here in the U.K., meanwhile, think of our own FTSE's information technology sector, and blockbuster businesses come much less easily to mind. Indeed, the sector itself is a mere minnow. Last time I looked, it made up just 1.5% of the FTSE 100 (INDEX: ^FTSE) by market capitalization.
What's more, many investors actively shun it -- even though the dot-com crash was 12 years ago.
Here be turkeys
In part, that caution is understandable. 2010's hot high-tech flotation Promethean World, for instance, promptly sank like a stone. Floated at 200 pence, the share price slid on the back of bad results and profit warnings. It duly hit 50 pence and has pretty much stayed there ever since, with Promethean's shares changing hands today at 45 pence.
And last year, Micro Focus International -- an FTSE 250 business with a track record stretching back almost four decades -- also hit the buffers on the back of slumping sales forecasts. The share price tanked by 50% and has lagged the FTSE ever since.
More recently, Facebook has famously highlighted the dangers of overhyped information technology shares. Floated at $38, the shares are $32 as I write -- with lawsuits piling up from aggrieved investors who have suddenly realized they bought a turkey, not a tech titan.
Dogs and divas
Yet the FTSE's information technology sector does have some decent businesses.
Even Micro Focus is a decent business, albeit one with flawed forecasting processes. I owned its shares in the 1980s and 1990s and could certainly imagine holding them again. Meanwhile, Autonomy -- recently acquired by Hewlett-Packard -- was another decent business, although its shares were always a tad too pricey for me (but not for HP, clearly, which last year forked over more than $10.2 billion to buy the business).
And the good news for investors? There are other decent information technology picks out there.
Over on one of the Fool's popular discussion boards for income investors, for instance, FTSE 100 enterprise system business Sage (ISE: SGE.L) has recently come into view, thanks to a forecast yield now standing at 4.4% and a reasonable-looking price-to-earnings ratio of 12.
Fly by night? I don't think so. With 800,000 business customers in the U.K. alone -- from single-person start‑ups to stock-exchange giants -- Sage has a revenue model that Facebook can only envy, not to mention a darn sight more paying customers.
Microprocessor designer ARM Holdings (NAS: ARMH) is another FTSE 100 business and is of a similar vintage to Sage, tracing its roots back to Acorn Computers, which made the BBC Micro in the 1980s. Apple, which co-founded the business, remains a major customer, and today ARM's low-power chips are used in almost all the world's smartphones.
On a forecast yield of just 0.9%, income investors certainly won't be interested. The investment thesis? On a prospective P/E of 29, ARM is rated as a growth share for the long term.
Finally, let's look at FTSE 250 share AVEVA (ISE: AVV) , which, having been founded in 1967, is actually older than both Sage and ARM. And again, it's a solid business with a broad customer base. With a global network of offices employing some 800 people spread over 23 countries, AVEVA serves the world's plant, power, and marine industries, developing integrated engineering software that embraces every aspect of major engineering projects, from initial 3-D design through to procurement, materials management, and project control.
Again, it's not one for income investors, offering a sub-par forward yield of 1.9% and rated at a P/E of 19. But with a track record of delivering rock-solid growth in sales revenues and earnings per share, AVEVA -- like ARM -- offers decent prospects of long-term growth.
Up and coming?
Nor is the main market the only option for investors. As I've remarked before, Web‑based commerce is growing in the U.K. at roughly twice the rate of economies such as the U.S.
And that might -- might -- spell opportunities for innovative British IT firms both to grow rapidly here in the U.K. and to spread their wings abroad. Further research is required, of course, but AIM-traded @UK, Blinkx, and Bango, could be worth keeping an eye on. For there was a time when Sage, Autonomy, ARM, and AVEVA were that size, too.
Perhaps, though, information technology simply isn't for you. And if so, you aren't alone. For many investors, the lessons learned in the dot-com crash were tough ones -- even if businesses with the qualities of ARM, Sage, and AVEVA seem far removed from doomed-to-fail dot-com dogs such as boo.com.
So for three other FTSE sectors showing promise and boasting great businesses, take a look at this free report from The Motley Fool: "Top Sectors for 2012." There isn't, I guarantee you, a boo.com to be seen, and what's more, I hold several of the shares covered myself. However, I don't yet own a minnow of which I wasn't previously aware. But with its substantial free cash flow and stout balance sheet stuffed with cash, I'm certainly keen to find out more. As I say, the report is free, so what have you got to lose by requesting a copy? It can be in your inbox in seconds.
Where is the U.K.'s leading dividend stock‑picker investing today? The identities of Neil Woodford's favorite blue chips are revealed in this free Motley Fool report: "8 Shares Held By Britain's Super Investor."
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At the time this article was published Malcolm does not own any shares mentioned in this article. The Motley Fool owns shares in Google and has recommended shares in Micro Focus. The Motley Fool owns shares of Google and Microsoft. The Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple, Microsoft, and Google. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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