When you have a solid gain in a stock and the company’s about to report earnings, the big question is whether to hold through earnings for more upside or cash in. It’s an especially important question given how volatile the last earnings season was and how volatile this one is expected to be as well.
With investors punishing companies — often far too severely — for even the smallest unexpected comment, this was a strong factor in my recommending in one of my newsletters that we take profits in Tyler Technologies, Inc. (NYSE:TYL).
There were other factors as well, but before I get to that, let’s quickly talk a little about what TYL does and why I recommended it in the first place.
Tyler Technologies is the country’s largest company solely dedicated to providing software and services to the public sector. It helps municipalities manage their IT costs through its broad range of software solutions, serving as the backbone for core business functions and working with local governments and schools to streamline the different aspects of their financial management, courts, property tax, public safety and public records — just to name a few.
Let me give you an example.
Boerne, Texas — one of the fasting-growing cities in the country — needed to keep up with its 70% population surge since 2000. To handle the increase, the police department used TYL’s public safety software to switch to iPads and equip patrol cars with tablets.
The transition helped the department respond to 911 calls in less than five minutes, decrease mobile unit costs by about 77% and allow officers to spend more time in the field and less time in the office filling out paperwork. Pretty cool, right?
TYL sells most of its products on a software-as-a-service (SaaS) basis through its private cloud, which saves government customers — who are very concerned about cash flow — the expense of implementing, operating and updating these costly systems.
This subscription model, along with the maintenance and service agreement TYL offers its clients, leads to a lot of recurring revenue for the company, something investors always like to see. In fact, management estimated this to be 62% of revenues in the fourth quarter of 2014.
Tyler reported fourth-quarter earnings in the beginning of February, which was a good catalyst for a nice upward swing. Management was upbeat on the conference call, noting that government activity remained strong, and provided solid guidance for 2015 — and I thought it may even be a bit conservative.
Either way, the company’s impressive potential and near-term catalysts told me that this was a buying opportunity, so we jumped on the shares the following week.
The stock was a solid performer on my GameChangers Buy List from the get-go, so with its first-quarter earnings report looming ahead, why was it smart to bank our profits?
Primarily because it wasn’t worth risking 10% gains in just two months — about a 70% return annualized. Monday’s early-morning strength pushed the stock to the upper end of its channel, and I suspected it would continue trading nervously ahead of its earnings report.
And considering the fact that expectations are quite high — analysts are looking to see earnings of 55 cents a share (up from 43 cents a share last year) on a 16.7% jump in revenues — any miss could make TYL vulnerable to a pullback.
Even still, I continue to like the characteristics of this company for the long term, especially its recurring revenue stream, so I will continue to follow TYL and possibly recommend it again given the right opportunity. A 10% return in just two months is excellent, especially in a somewhat range-bound market and a jittery earnings environment, so I felt it was time to lock in our gains.