by Tom Taulli | July 18, 2013 12:15 pm
While 2013 has been a rip-roaring year for stocks in general, the tech sector hasn’t been as universally bullish.
For a broad picture, one need only look at the Technology SPDR (XLK), a collection of some of tech’s largest names. While the ETF is at multiyear highs thanks to an 11% run year-to-date, it’s still vastly underperforming the S&P 500, itself up 18% and playing with all-time highs today.
That’s because on an individual level, tech stocks have been weighed down by lagging returns from the likes of Oracle (ORCL), Apple (AAPL) and IBM (IBM) despite the red-hot runs of Google (GOOG) and others.
Of course, the tech sector itself is vast, at nearly 2,200 publicly traded companies. So lost among all these big names and hardly accounted for in the broader picture for tech is a universe of smaller or lesser-known companies — many of which are already booming or have enormous potential down the road.
What are some of these hidden gems? Well, here’s a look at five:
MedAssets (MDAS) operates a cloud platform that helps hospitals find ways to mitigate costs and boost revenues. Some of the capabilities include clinical documentation, pricing analysis, supply chain optimization, claims processing, accounts receivable services, and charge capture.
As one might imagine, the market demand for this technology is massive. Drivers include government pressure to lower reimbursements; the complexities of regulations; the negotiating leverage from managed-care organizations; and the impact of Obamacare, which is likely to result in a surge in hospital stays.
But perhaps the biggest factor is the aging of the U.S. population as baby boomers hit age 65 in droves; Pew Research says that every day, 10,000 people reach retirement age.
Since hospitals already have to get by on small operating margins (often around 3%), they have turned increasingly to automation — a trend that has certainly benefited MedAssets.
From 2008 to 2012, MedAssets’ revenues have zoomed from $280 million to $640 million — and that’s out of a total market opportunity that MDAS estimates at $13 billion. Plus, operating income has doubled in that time. as operating income doubled to $85 million. Meanwhile, MDAS is outperforming the market by a few percentage points with 22% year-to-date gains.
Considering the megatrends pushing the industry forward, you can expect this growth ramp and stock performance to continue for the long haul.
Aspen Technology’s (AZPN) software helps companies manage the complex systems of process industries like energy, chemicals and construction. Its offerings can help companies improve their supply chain management, manufacturing operations and engineering for dealing with feedstocks.
This is no easy field. A small change in a chemical process can have a significant impact on efficiency and costs — for better or worse — and any tinkering always has to be made in compliance with myriad complex regulations.
But Aspen has proven its ability, earning 1,500 customers Exxon Mobil (XOM), Halliburton (HAL) and DuPont (DD), and prompting investors to gin up AZPN shares more than 600% in the past decade.
That said, several important trends are helping to push Aspen, too, including the growth in natural gas-processing plants in North America and the growth of emerging markets, which have become booming sources of demand.
Overall, the growth rates are robust. In the engineering space, the estimate is for 10% growth through 2015; that figure is 12% for energy, chemicals and pharma.
Best of all, AZPN’s financials are solid. Revenues have surged ahead 46% to $243 million in the past two years, and the company estimates that free cash flow will hit $130 million in FY13, up from $59 million a couple years ago.
Founded in 1994, Ansys (ANSS) is a pioneer of the engineering simulation software market. The company’s technology has widespread adoption across industries like aerospace, automotive, manufacturing, electronics, biomedical, energy and defense.
Think of Ansys as computer-aided design (CAD) on steroids. The software allows for the creation of prototypes that account for real-world environments, heat transfer, fluid flow and electromagnetics. The result is faster time to market, as well as lower costs and improved customer experiences.
A key part of Ansys’ strategy has been partnerships. Over the years, it has struck agreements with companies like Autodesk (ADSK), Dassault, Agilent (A), Cadence Design Systems (CDNS) and Siemens (SI).
To pull this off, Ansys has benefited from a long history of investing heavily in research & development, with expenditures coming to around 16% of revenues.
For fiscal 2013, the company estimates a range of 11% to 14%, but the company could boost this even more if it continues pushing its M&A, which in the past has included deals for Apache Design and Esterel.
Shares of ChannelAdvisor (ECOM) are up 27% just since mid-May, when the company came public.
But there easily could be plenty more upside..
ECOM has a cloud platform that makes it easier for retailers and manufacturers to sell into online channels like eBay (EBAY) and Amazon (AMZN). The software allows for management of product listing, inventory availability, pricing optimization, data analytics and search term processing, which has attracted customers including Dell (DELL), Sony (SNE) and Under Armour (UA).
ChannelAdvisor has a clever business model based on both ongoing subscriptions and revenue share that has resulted in a nice growth ramp. The company’s revenues have improved from $36.7 million to $53.6 million from 2010 to 2012.
While the company did record a net loss of $4.9 million last year, that can be blamed on aggressive investment in growth.
Over time, expect ECON to make its way into the black.
Through aggressive acquisitions, HomeAway (AWAY) has created the biggest marketplace for vacation rentals. In the latest quarter, AWAY had 742,000 paid listings across 171 countries, and its sites attracted 207 million people, up 22% over the past year.
Online marketplaces can certainly turn into powerful businesses with strong barriers to entry — take eBay, for instance. They benefit from network effects, which means the value of a platform gets exponentially more valuable as the number of users and listings increase.
As for HomeAway, growth has been healthy. In fiscal 2012, revenues hit $280 million, up 22% over the prior year, and this growth ramp has continued into 2013. Plus, AWAY is a nice cash generator, with EBITDA coming to a juicy $80 million last year.
Factors that could drive HomeAway even further is continued improvement in the U.S. economy and secular trends such as baby boomers retiring — both of which should help the vacation industry.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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