RELX, Sage and Next are just some of the top UK technology stocks that investors have failed to realise are high growth, according to Artemis fund manager, Andy Marsh.
Technology stocks have been dominating headlines in 2022 for all the wrong reasons. Higher inflation and the expectation of further interest rate hikes from central banks reduce the relative value of these firms’ potential future earnings, resulting in the recent stock market collapse.
Many tech-heavy indices have nosedived in the early weeks of this year, the most high-profile being the US’ S&P 500 and Nasdaq indices, which are down 6.4% and 10.7% respectively since 1 January.
Performance of S&P 500 and Nasdaq YTD
Source: FE Analytics
Faced with weakening returns, investors who are overweight to the US have sought to recalibrate their portfolios. However, those that still want exposure to technology should consider the UK, according to Marsh.
He said that the UK offered several tech opportunities that were being bypassed because the domestic market is typically viewed as full of ‘value’ stocks.
It was easy to see why the UK had this label, Marsh said. The FTSE 100’s 20 biggest names are predominantly banks, miners, energy and airlines, all cyclical sectors, which combined make up 60% of the index.
Marsh said that while many of these big UK value stocks were still “worthy enough investments” they were more “adult than adolescent” in their lifecycle.
Looking outside of this group at the remaining 40%, he noted there were plenty of options outside of these value stocks, that were cheaper than their US cousins simply due to where they were listed.
Below, Marsh broke down five UK “digitally savvy companies” that have embraced tech to open up “huge market opportunities”.
Pearson
One of the companies was academic publisher Pearson. Founded in 1940 it has made some very modern changes recently, acquiring Credly, a digital workforce credentials and certifications company.
This purchase was an attempt to keep up with the accelerated transition to digital learning brought about by the pandemic, according to Hargreaves Lansdown analysts.
They said it was “hard to fault the logic of the deal with the new business offering working as a single ecosystem to track workers' learning. In theory we think Credly should fit in pretty seamlessly to Pearson's existing business.”
Marsh seconded this, adding that the business was “well placed to capitalise on the shift to ongoing digital learning”, especially among universities, which were struggling to justify £30,000 fees for a course which the pandemic proved can be delivered virtually – in most cases.
Pearson's performance has struggled in the past decade losing 25% underperforming. In contrast the FTSE 100 made 88.3% during that time. FE fundinfo Alpha Manager Nick Train has been a long-term investor in the company and continues to hold the publisher, although he has reduced Lindsell Train's holding significnatly the past couple of years.
RELX
RELX was another publisher Marsh highlighted for similar reasons to Pearson, having successfully negotiated the tech transition within its industry.
Founded in the 1800s the company still has a traditional paper-printed offering but the majority of its business comes from digital products, which generate almost 90% of the revenue.
The company has four segments, all of which offer a different use for its analytics. The most well-known is the scientific portion, which involves publishing medical journals. All of the publications have a subscription-based service, which is used by research institutions, hospitals and university libraries, and generates most of the online returns.
RELX has had a strong decade, making five times the FTSE 100's returns during that time, shown below..
Performance of stock vs FTSE 100 in the past 10yrs
Source: FE Analytics
Smiths Group
Moving away from publishers the Artemis manager highlighted Smiths Group, an engineering business that started out making watches for the Navy.
“That was the cutting-edge technology of its time,” Marsh said. “And the business is still technology driven. It makes airport security scanning equipment and sensors.”
The company recently sold the US side of its medical division to ICU Medical for $2.4bn (£1.8bn), scrapping an earlier $2bn (£1.5bn) bid from private equity firm TA Associates on the basis the ICU’s offer was the more “superior”, according to Smiths. The plan is to return 55% of net cash proceeds from the sale to investors through a share buyback scheme and use the remainder for investment and enhancing the balance sheet.
The parent company said that the deal “simplifies and positions Smiths for focused growth in its core industrial technology business”, entrenching itself as a tech stock.
Over 10 years the stock returned 103.3%.
Next
Retail brand Next was another Marsh highlighted, noting that it had “transformed itself in the past 10 years” to become “much more than just a clothing retailer” by building a “strong online presence”.
Marsh said it had manged to turn its own cost base into revenue opportunities, by acting as a platform for other businesses at the front and back end, noting that not many understood “just how Next has transformed the scale of opportunity in this way”.
He said the company is growing to be the UK equivalent of German e-commerce giant Zolando, which is modelled in a similar way. Next is on a P/E of 13x and Zolando is on 60x, a huge opportunity if Next can mirror this growth, the manager added.
The retailer has had a strong decade, making 256.1% total returns, well ahead of the FTSE 100.
Performance of stock vs FTSE 100 in the past 10yrs
20220217_artemis_UK_five_tech_stocks_emj_2
Source: FE Analytics
Sage Group
The final stock was accounting and software business, Sage Group, which Marsh also had an overseas parallel for.
“Its American equivalent is probably Intuit. Intuit trades on a P/E of 78; Sage is on 27,” he said.
“It provides accounting and other associated services to smaller businesses but has become a very big business in the process, with a market cap of over £7bn.”
The stock made a total return of 205.4% over 10 years.