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Are these 6 IT companies on your watchlist?

The information technology (IT) sector is a wonderful place for investors to search for companies with appealing attributes such as moats and high profit margins. The IT sector is split into two industry groups: Software & Services and Technology Hardware & Equipment. Today we take a look through the Software & Services industry for opportunities.

Contrarian

One area within the IT sector which has fallen out of favour with many investors has been the consultancy and service providers. The cause of investor dislike for these companies has been government and corporate delays to upgrading their software. This has hurt both the top lines and the bottom lines of a number of companies exposed to this sector, however there is only so long that clients can delay their upgrades before it affects their own performance too. One highly regarded company in this space which has been affected by the delay trend is SMS Management & Technology Limited (ASX: SMX). SMS is trading near its year-low and on 13 times forecast financial-year (FY) 2015 earnings of 31.5 cents per share. Given that from 2008 to 2012 SMS earned at least 35 cents per share (cps) this doesn’t seen demanding.

Defensive

Computershare Limited (ASX: CPU) is a leading provider of share registry services with operations in around 20 countries. With a broad base of clients diversified not just by geography but also by industry, currency and service provision, Computershare has a defensive revenue stream which has allowed for a growing stream of dividends to be paid out by the company.

Growth

Carsales.com Limited (ASX: CRZ) holds a commanding position in the domestic automotive classified advertising market. Its entrenched leadership position provides the company with economies of scale and juicy margins. With growth in its Australia business maturing, if Carsales.com can expand offshore with similar success to its peers SEEK Limited (ASX: SEK) and REA Group Limited (ASX: REA) then it could continue its current impressive rate of growth.

Yield

DWS Ltd (ASX: DWS) provides IT services nationally. The stock is currently trading at $1.29 which is towards the low-end of its 52-week high and low of $1.70 and $1.15 respectively. Analyst consensus estimates provided by Morningstar have DWS earning 11.2 cps and paying dividends totalling 10.1 cps in FY 2014. Based on this forecast the stock is trading on a fully franked dividend yield of 7.8%.

Speculative

The following two companies have incredible potential but exactly what the future cash flows and hence value of their businesses will be is still highly speculative. Although XERO FPO NZ (ASX: XRO) and Mint Wireless Limited (ASX: MNW) have already recorded share price gains of 546% and 1,668% respectively, they could probably go much higher if they ultimately realise their full potential .

 

Foolish takeaway

While there are opportunities to profit in all sectors of the market, smart investors often limit their investments to companies that they believe are within their circle of competence. Given the quality and growth potential of numerous IT stocks, it is a sector worth trying to understand and having within your circle.

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Motley Fool contributor Tim McArthur owns shares in SMS Management & Technology Ltd.

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