4 high-quality tech and telco stocks for your portfolio

As I discussed in a previous article here, investors who focus on purchasing companies with above average returns on equity (ROE) are well placed to purchase companies of above-average quality.

It is also beneficial to buy businesses operating in industries experiencing a tailwind rather than a headwind, which makes the following four companies that operate across the technology and telecommunications industries even more desirable.

1.  Iress (ASX: IRE) provides critical software systems to financial industry participants. The company’s equity systems and wealth management systems command major market share within their respective markets of Australia, New Zealand, Canada and South Africa; while Iress’ presence in Asia and the UK is also growing.

According to Morningstar’s data, ROE for financial year 2012 was 31% (Iress has a December year-end), although ROE has been declining over the past decade from a high of 48%, Iress is still outstandingly profitable. This quality has been reflected in the company’s total shareholder return, which has averaged just over 19% per annum for the past decade.

2. REA Group (ASX: REA) is better known by its flagship website, however the company is diversifying and now has websites across Europe and Hong Kong as well. With a ROE of nearly 35%, forecasts for growth of over 20% in earnings for the next two years, and its dominant market position, the high quality nature of this stock is hard to argue with.

3. TPG Telecom (ASX: TPM) is one of a handful of ‘second-tier’ telecommunication stocks which have grown rapidly over the past few years. TPG operates across the full suite of telco services including phone, broadband and data services to corporate, retail and wholesale customers. The $3.4 billion company saw its ROE increase to nearly 21% for the year ending June 2013, up from 15.4% the year before.

4. iiNet (ASX: IIN) also falls into the ‘second tier’ telco category with its offer of broadband internet, mobile and associated services. The company grew its ROE of 18.8% for the 2013 financial year, which according to Morningstar was its highest level in the past decade.

Foolish takeaway

Perhaps the greatest problem with companies that produce above-average margins and returns is that other investors like them so much that the share prices often don’t look appealing to Foolish buyers when compared to the company’s intrinsic value. A quick check of the 52-week trading ranges of the above stocks however shows that each of these firms could have been purchased at significantly lower prices in just the last year – which is why, for long-term investors, patience is a virtue!

After a stock idea that is actionable right now? Discover The Motley Fool’s favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.”

More reading

Motley Fool contributor Tim McArthur owns shares in Iress.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.