Why tech stocks are missing from the SIF Portfolio (AMO, OMG, TTG, PTEC)

Investors in technology stocks have done well over the last year. According to figures from the FT, the technology sector has risen by about 25% in that time. That’s more than double the 12% managed by the FTSE All-Share index, although it does lag the 31% gain delivered by the AIM market.

I’m mentioning this today because the SIF portfolio hasn’t really had much exposure to technology stocks over the last year. Although former holding XLMedia and current holding Taptica International are technology businesses, they are also marketing operations. Both are classified as Consumer Cyclicals rather than Technology companies.

Today I’m going to follow up on my piece from two weeks ago, where I looked at the portfolio’s sector allocation. I found that my stock-picking rules have left the portfolio overweight in sectors such as Industrials, which have outperformed over the last year.

At the same time, the portfolio’s exposure to underperforming sectors like Energy and Telecoms has been limited. This has helped the portfolio deliver a 1-year gain of 25%, versus 12% for its benchmark, the FTSE All-Share.

The strong performance of the Technology sector has left me wondering why my stock screen hasn’t highlighted any opportunities in this area over the last year. As far as I can tell, it’s mainly a question of valuation. Interestingly, four tech stocks qualify for the relaxed version of my screen, which looks at slightly more expensive stocks. So if recent falls continue, one or more of these stocks could soon qualify for the SIF Portfolio.

Amino Technologies

Television set-top box maker Amino Technologies will be familiar to readers of Paul Scott and Graham Neary’s excellent small cap reports. It’s an affordable looking business with strong cash generation and a decent record of growth.

I’ve previously been uncertain about the long-term outlook for this business, suggesting that the functionality provided by set-top boxes may soon migrate into the cloud or be built into televisions. So far my caution seems to have been misplaced.

In its recent interim results, Amino discussed the opportunities that are arising from its ability to update the software of legacy boxes. This means that cable network operators can upgrade their networks to new IP-based services without the cost and complexity of having to upgrade customers’ set-top boxes.

The shares have risen by 50% over the last year but still score well on Stockopedia, with a StockRank Style of Super Stock and a StockRank of 99. Amino also passes 13/14 of my screening rules, only falling short because of an earnings yield of 6.6%.

I estimate that a share price of about 155p would be required to lift the earnings yield to my threshold of 8%. That’s around 18% below the current price of 190p. That seems unlikely, but it’s not impossible. After all, the stock has already fallen 13% from May’s high of 220p.

Oxford Metrics

Software developer Oxford Metrics makes analytics and infrastructure management software for customers including highways authorities, Hollywood studios and hospitals. It seems like clever stuff to me. Better still is that this cleverness now appears to be generating rising profits and plenty of surplus cash.

The group’s share price has climbed 30% over the last three months, thanks mainly to a strong set of interim results. These showed record H1 revenue and net cash of £11.1m, double that of one year ago.

This company fails two of my screening rules, but only by a tiny margin:

A slight pullback in the share price would be enough to clear these fails from the list. Given the shape of the share price chart, a period of consolidation seems possible or even likely to me:

Oxford Metrics stock now trades on a forecast P/E of 26, falling to a P/E of 17 for 2018. It’s not cheap, but the group’s profits are backed by free cash flow and healthy margins. At first glance, I’d be happy to add this stock to the SIF portfolio if the opportunity arises.

TT Electronics

TT Electronics makes electronic sensors for automotive manufacturers and industrial markets. The group is obviously exposed to any future downturn in these sectors but trading appears to be strong at the moment.

In its most recent trading statement, TT said that the group’s order book was “strongly ahead of the prior year”, giving good revenue visibility. The company believes that its plan to focus on “structural growth markets where there is increasing electronic content” is paying off.

Revenue at constant exchange rates rose by 3% last year, while operating profit was 26% higher on the same basis. Statutory figures were given a strong boost by currency factors, but the underlying trend seems to be that profitability is improving.

Stockopedia styles the firm as a Super Stock and it carries a StockRank of 91. At the time of writing, the only thing stopping TT Electronics from qualifying for my SIF screen is an earnings yield of 7.7%, versus my threshold of 8%. It’s certainly a stock I’d be happy to consider adding to the portfolio.

Playtech

The last of my four tech stock candidates is rather larger than the others. FTSE 250 group Playtech has a market cap of £3bn and specialises in gaming software. It provides services to operators including William Hill, Betfair and Sky.

The firm’s founder, Teddy Sagi, recently sold 10% of his 17% stake in the firm to finance a move into real estate. This knocked the share price in June:

The resulting sell off has left Playtech trading very close to the valuation needed for it to qualify for my screen:

Playtech passes all my other screening rules and looks reasonably valued, on a rolling forecast P/E of 12.2 and a yield of 3.6%. However, even if it qualifies for my screen, this stock would rank below the others I’ve looked at this week due to its StockRank of 73. Although a respectable score, the other three all have ranks of more than 90, suggesting a higher probability of outperformance.

Coming next week

All four of these stocks have experienced some share price weakness recently. If this continues, there’s a good chance at least one of them will make its way into the SIF Portfolio.

The portfolio’s shortage of cash has prevented any additions in recent weeks. However, this should be rectified next week when McColl’s Retail, Miton Group and Wincanton are all due for review. Selling one or more of these holdings should free up some cash for fresh opportunities.