5 tech stocks to weather the storm

Much as the headlines may proclaim that this is the end of the world, most companies will continue to do business and make profits, and share prices in many companies will recover once we find a bottom. That's not to say that you should blindly dive into buying stocks that have been hit hard, or hold onto your portfolio in the hope that everything will turn out alright. Instead, this is the time to review your holdings and make some tough decisions about the stocks you hold. There are likely to be some that you will need to let go, replacing them with quality stocks that are likely to provide you with solid returns over the long term. If you hold a portfolio of high-risk, speculative stocks at that time diversifying your portfolio to include some solid, lower-risk companies may not be such a bad idea.

Today we analyse the Australian innovation sector - which has held up better than most over the past week - to see which stocks may be worth a closer look.

The Australian information innovation sector has been a disappointing performer over the past year, though much the same could be said for the wider market - particular afterwards the week we just had. However this is precisely why investors should take a closer look, according to equities analyst James Samson, of Lincoln Indicators.

The tech wreck

"Since the tech wreck, IT stocks may all in all be seen as volatile growth opportunities," he says. "Nevertheless, this attitude is changing as more companies begin to place greater emphasis on the role IT plays. High levels of customisation within IT systems coupled with an entrenched need for quality have become accepted traits of many businesses. IT is now a far greater priority in the strategy and success of a business. With the evolution of cloud computing, the hype has begun in tech markets once more."

And this is hard to refute if you look at the surge in innovation shares in the US, even factoring in the recent correction in share prices. Apple shares are up 56% over the past year, Google 57% and LinkedIn 102% afterwards its recent IPO that soared over 90% on day one. The hype around the upcoming Zynga, Facebook and Groupon IPOs as well point to a change for the better for the research sector. Sure, Aussie companies can hardly be compared with these tech giants, nevertheless positive sentiment for the sector bodes then for upcoming tech companies here at home.

The Australian IT sector consists of about 110 companies for a market capitalisation of about $12.25 billion. It’s relatively small market capitalisation may say something about company and sector risk when compared to S&P/ASX 200 market capitalisation of $1.157 trillion on June 21, 2011. According to Standard & Poor’s, the IT sector has been disappointing, posting a negative annualised price return of 7.76 per cent in the past 12 months to May 31, 2011. Opposite, the S&P/ASX 200 recorded a positive annualised price return of 6.29 per cent over the same period. Nevertheless, Samson believes the performance of the IT sector will improve and become more consistent in response to an ever increasing and innovative role innovation will play in managing and generating business.

Shining example of technology

Samson says cloud computing is a shining example of technology and it highlights "the need for businesses to be adaptive to technological changes". He says his choice list consists of financially healthy companies then placed to benefit from renewed investor focus in the IT sector.

Provides billing and rating systems to companies as a general rule in the energy, utilities and telecommunications sectors. The company generates about 40 per cent of revenue overseas, nevertheless Samson says it’s weathered the effects of a rising Australian dollar courtesy of a "natural hedge" in labour costs as offshore accounts for about 30 per cent. "In spite of currency headwinds, Hansen recently upgraded revenues guidance," Samson says. "Given the liquid and advancing nature of billing systems globally, this company is then placed to take advantage of this possibility."

In financial circles, Iress Market Research is widely known for its branded stockmarket and wealth management software systems in Australia, Canada, New Zealand and South Africa. Services predominantly include real-time data, analysis and news. Samson says as a market leader, the stock offers defensive qualities. "To complement these defensive qualities, the company’s dividend yield is above 4 per cent and this has been reasonably consistent in recent years," he says. "The company’s financial health is strong."

SMS Management and InnovationMarket capitalisation: $395 millionPrice/revenues ratio: 12.6 timesShare price: $5.78

Outsourcing IT

An outsourcing IT and consultancy firm servicing businesses in Australia, the UK and Asia. "What’s pleasing is the company’s high level of repeat business from existing customers in the financial and government sectors," Samson says. "During we believe that IT consultancy represents more risk than a software or hardware provider, the importance of an efficiently run IT department is becoming increasingly vital to businesses. SMS offers investors with quality exposure to this segment."