Tech Ideas For Those Who Are Worried About High Valuations

Plantronics (PLT)

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PLT’s 0.34 Price/Sales ratio tells us a lot, and no, its not telling us that the stock is a no-brainer Buy. It may well be a Buy (the Power Gauge rank is “Bullish”), but such a trade will need to be supported by brainpower. No matter what the gurus say, Mr. Market is not going to hand you a 0.34 Price/Sales ratio without expecting you to take on some baggage. Here, the baggage is the lingering financial impact of the company’s huge 2018 acquisition of Polycom, which broadened the product line, boosted sales, but also resulted in big increases in debt and R&D such as to drive a formerly-profitable income statement into the red. For today’s investment theme — future growth powered by emerging tech — I can and often do live with current red ink; its part of the landscape, so long as we have credible expectations that the company can grow its way to good profitability down the road, an especially noteworthy concern for small caps such as PLT, where fixed-cost burdens are commonplace. The story here involves contemporary communications, headsets, conference-call hardware, desktop phones, etc. With COVID-induced work at home, equipping for this activity has become a hot trend. COVID won’t last forever (so we all hope and presume), but although there may be a deceleration in distributed work groups, society is coming to realize there are a lot of benefits to the sort of workplace re-evaluations COVID forced on us, and many expect long-term re-thinking along these lines. PLT can’t at this time support such an investment case with current numbers. I can say, however, the the “Bullish” Power Gauge is being driven by valuation (on all ratios, not just P/S) and also by a “Very Bullish” rank in the five-factor Technicals category. That means we’re working with a wisdom-of-crowds type of market judgment. This is completely alien to academic notions of value investing, but it’s not as if those folks been setting the world in fire lately. If you want to try the sort of theory-expectations based approach to value I described above, let’s call this a high-risk/high-potential play in this area (the material to which I linked above also explains that low valuations are associated with higher business risk).

SS&C Technologies (SSNC)

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As value plays go, SSNC’s price/sales ratio of 3.49 puts it on the aggressive side of the spectrum. But the way things are nowadays, when we compare that to what else is out there, the P/S Power Gauge factor rank still winds up with a Bullish rating. The core of this company’s business is software, mainly accounting for investment managers and funds. Hedge funds and mutual funds comprise big areas for SSNC. Billing is not directly tied to asset size but as assets under management rise, fees charged by SSNC become less burdensome, so the company is leveraged a bit to asset growth (and if it’s not always in the equities asset class, that’s OK for SSNC). This is a sticky area since its often more trouble than its worth for a fund to switch systems. Meanwhile, the company is an acquirer and is expanding in the health care area.

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Disclosure: Long XITK.

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