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‘Heads I win, tails I win’ investing

Earlier this week I found myself coming very close to throwing my beloved smart phone out the train window.  You’d be tempted too if your live video conference with people on the other side of the world was disrupted, if only for the briefest of periods…

When lamenting such technological frustrations, it’s easy to forget just how far technology has come in such a short period.  And as incredible as the advance has been, it seems that the pace of change is likely to only quicken in the years ahead.  It’s a brave new world and no doubt fortunes are to be made in identifying the next big thing.

The trouble is, while most fledgling technologies hold great potential, very few ever attain any real financial success.  As an investor, how do you predict who will win out in the end?

Which horse to back?

They say the best way to profit from a mining boom is to back the person selling picks & shovels — but is there an IT equivalent?  Are there businesses that can take an agnostic approach and yet still remain relevant in an ever changing industry?

Enter the IT services sector.  Whatever the future may bring, one thing is certain; there will be change and someone will need to facilitate that change.

One such company is SMS Management & Technology (ASX: SMX).  SMS services the big end of town, and for the better part of the last 30 years has helped its clients transition through, and benefit from, massive and ongoing technological change.

Whatever the IT needs of its clients, there’s a good chance SMS will be able to design, implement and maintain the necessary systems.  The company is likewise not wedded to any given industry – whether you are a manufacturer, retailer or miner, having the right IT systems is absolutely critical.

Not without its challenges

It’s been a tough couple of years for the company, and indeed the wider IT sector.  Stretched balance sheets and lacklustre business sentiment have restrained much needed IT investment.  Paying highly skilled IT technicians to sit around playing solitaire is not good for the bottom line! Furthermore, competitive pressures exist with the growing prevalence of offshore low-cost providers, and the rise of ‘cloud’ type service delivery represents yet another challenge.

However given that the business has remained relevant over the past few decades of substantial change, there is some room for confidence.  And while no one can know for sure when the cycle will turn, as sure as night follows day, it must surely turn at some point.  With a strong balance sheet and recurring maintenance work underpinning much of its revenue, SMS is better placed than most to weather the downturn.

In this day and age, modern IT systems are not merely nice to have, they are essential. Companies that fail to keep up with the competition will be seriously disadvantaged.  You don’t have to have the latest and greatest systems to be effective, but at the same time you cannot rely on an abacus when your competitors are using supercomputers.

Foolish takeaway

Regardless of what the future may look like, it’s a safe bet that technology will only grow in importance.  Yes, things are tough for the sector at present, but that’s often when share prices are at their cheapest.  Things won’t improve overnight, but for those investors able to look beyond the short term, a contrarian approach may be well rewarded.

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Andrew Page is a Motley Fool analyst. You can follow The Motley Fool on Twitter @TheMotleyFoolAu. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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