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Reckon Limited rockets ahead of earnings, is this tech share a buy?

The share price of Reckon Limited (ASX: RKN) has surged almost 7% higher today despite there being no news out of the accounting software company.

But one thing that is on the horizon that may have piqued interest in the company is its interim results. Reckon is expected to report them tomorrow morning and it would appear as though some investors are feeling bullish ahead of the big announcement.

With the strong growth of rivals XERO FPO NZX (ASX: XRO) and Myob Group Ltd (ASX: MYO), the market is expecting Reckon’s profit to drop for a second year running according to CommSec. These subdued expectations have no doubt contributed to its share price losing 37% of its value since the turn of the year.

But could a turnaround in its share price be coming?

At 15x estimated full year earnings its shares are trading at a considerable discount to its peers. This could definitely make them an attractive option to investors should they manage to reignite earnings growth.

But in the face of such fierce competition this is no easy feat. The increasing level of competition at home and from international competitors has put a strain on both sales and margins. Last year sales dropped from $100.8 million to $92.3 million and its net profit margin fell from 16.8% to 15.8%.

This year I am expecting more of the same unfortunately and thus would suggest avoiding it however tempting it may be. Whilst expectations are low and any sign of a turnaround in fortunes could get the market excited and send the share price higher, I still feel a long-term investment in Xero would be a better move for investors at this point.

Before making an investment in either company I would suggest checking to see if you have either of these three rotten ASX shares in your portfolio. Each could be harming your portfolio and might be best taken out if you ask me.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia owns shares of Xero. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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