One day you will look back and remember that today was the day you first heard of this simple four letter word…SMAC. This stands for Social Media, Mobile Computing, Analytics (also known as Big Data), and Cloud Computing. The mainstream media hasn’t caught onto it yet and 9 out of 10 investors have never heard of it, but SMAC technology is spreading faster than tablets, smartphones or social media combined.
Never before in the history of modern day technology have so many monstrous, game changing technologies occurred simultaneously COMBINED to create such a formidable force of technological change. But that is exactly what is happening now.
According to industry watchdog IDC, SMAC is projected to capture a whopping 80% of all IT spending over the next 6 years. Spending will explode more than 65% to hit an astonishing $5 trillion by 2020.
As with any new tech revolution, this one has been simmering quietly behind the scenes for a few years. Insiders and forward-thinking business leaders have seen this shift to SMAC coming, but most investors and consumers have been in the dark.
But I’ve been paying close attention to this game changing technology, and locked in profits in five stocks in the space. Let’s take a look at our recent winners, and I’ll be back in touch as soon as I find the next SMAC opportunity.
SMAC Stock #1
PegaSystems’ (PEGA) software solutions help to streamline business operations, connect enterprises to their clients in real-time, as well as adapt to meet rapidly changing requirements. Its products are used by some of the biggest names in business, including Fortune 500 companies like Cisco Systems (CSCO), Bank of America (BAC) and PayPal – just to name a few.
PEGA was founded in 1983 by Alan Trefler, who has an interesting achievement in that he was co-champion of the 1975 World Open Chess Championship. As someone who’s been to many chess tournaments with one of my children’s teams and seen firsthand the importance of critical thinking to winning, I was very impressed to learn that Trefler approaches business the same way he approaches a chess match: by recognizing a pattern rather than just trying to understand one or two aspects about a customer to provide the best solution.
Today, PEGA is one of the few publicly-held software companies in the Boston area worth more than $1 billion, thanks in part to its patented Pega 7 software development platform. The software creates the infrastructure that allows PEGA’s clients to create customized, game-changing software that performs Customer Relationship Management (CRM) functions.
We bought PEGA in early 2015 and rode it to a strong 25% gain in just eight months. While PEGA had executed well over the previous two quarters and still had a good long-term outlook, software companies’ individual quarters are often uneven. Even a small discrepancy could hurt the shares, so with the risk/reward characteristics of the stock not looking optimal going into earnings, we protected our double-digit profits and sold PEGA.
SMAC Stock #2
Social media has clearly become a well-established part of the business world, with 96% of 18 to 35-year-olds using some form of it. The industry is still enjoying rapid growth, but it is now becoming mature enough where we can start separating the winners from the losers.
LinkedIn (LNKD) caught my eye as a dominant social media platform for career development.
One of the big reasons that I liked LNKD is because of its unique brand that will be difficult to replicate—even by a company as powerful as Facebook. LNKD has over 347 million members in 200 countries, so it will be hard for Facebook or any Internet company to successfully compete given its established base and huge first-mover advantage.
Plus, LNKD has several drivers in place that will help it continue to grow in the longer term. First, the company is already the “professional profile of record” for each of its members and now management is seeking to become a “publisher of record,” as LinkedIn.com is increasingly becoming a website where members keep up with the latest industry news.
While I still liked the company, the market’s negative reaction to second-quarter earnings results from Facebook (FB), Twitter (TWTR) and Yelp (YELP), made me cautious to hold LNKD ahead of its own quarterly report. It looked like any good news had already been priced into the stock and the risk/reward did not look favorable enough to hold the shares through earnings so we locked in our quick profits.This proved to be the right strategy, as the stock did decline sharply on the heels of its earnings report.
SMAC Stock #3
SS&C Technologies (SSNC) is a leading cloud-based provider of services and software for the global financial services industry, making it easier for clients to manage their front and back office operations while meeting regulatory responsibilities.
SSNC serves a variety of verticals within the financial services industry, including hedge funds, investment management companies, brokerage firms, and banks and insurance companies. The software SSNC provides helps its clients with accounting (fund accounting, investments and loans), reporting (regulatory, performance reports for clients and financial reporting) and middle office functions (performance calculation, risk management and collateral management and derivatives processing).
One very important aspect of the company’s growth that caught my attention is its disciplined and highly-focused acquisition strategy to increase its products and services, as well as to capitalize on evolving market opportunities.
Since 1995, SSNC has acquired 40 businesses, including Thomson Reuters’ PORTIA business in May 2012 for $170 million, which gave the company a presence in portfolio management software and outsourcing services for institutional investors. Just one month after, SSNC made an even larger acquisition, buying out GlobeOp financial services for $834.4 million to expand its hedge fund administration services. And last November, management acquired DST Global Solutions, a developer of investment management software, for $95 million.
Another key deal came earlier in 2015 when SSNC bought Advent Software (ADVS) for $44.25 a share in cash and assumption of all debt, for a total consideration of $2.7 billion. (The deal will be financed through a $3 billion debt offering and $400 million in equity.) Like SSNC, Advent also provides software and software-related services to its 4,500 investment management clients. Management believes the deal will save them $45 million annually after three years, as well as provide good opportunities in the combined customer base.
SSNC outperformed amid sluggish summer trading, giving us over 18% profits in less than three months. I decided to sell SSNC after management announced that they would be acquiring Citigroup’s (C) alternative investment pricing business for $400 million. This is a good niche acquisition for the company, and with our position up in the double digits and knocking on the door of our target price, it was time to lock in our gains.
SMAC Stock #4
Fleetmatics (FLTX) provides software to track data on everything from fuel usage to driver behavior, while also helping companies meet the challenges that come with managing local fleets and improving the productivity of their mobile workforces. Thousands of businesses rely on FLTX, including well-known companies like Comcast (CMCSA) and Time Warner Cable (TWC).
FLTX’s services are divided into two categories: Fleet Management Solutions and Fleet Service Management. The Fleet Management Solutions segment, which has over 500,000 vehicles subscribed, helps businesses manage their local fleets by extracting actionable business intelligence from vehicle and driver behavior data. By using FLTX’s products, customers can monitor driving performance and routes, as well as email notifications when unwarranted behavior occurs.
Fleet Service Management also helps businesses improve their time management, providing organized back-end functions (such as customer information, invoices and service history) and storing them in the cloud.
Comcast has had significant success with FLTX’s solutions, estimating $24 million a year in savings from lower gas and labor costs thanks to real-time GPS data and dynamic routing. FLTX provides Comcast dispatchers with real-time information on service technician locations, which allows the dispatchers to more effectively rout technicians.
Not only were idle hours and gasoline saved, technician on-time rates improved by 2%. The average idle time for a Comcast technician was one hour and 45 minutes per day. The company believes this can be lowered to 50 minutes per day, so if you find yourself not having to wait as long for a Comcast technician, you just might have Fleetmatics to thank!
I like that management has been able to grow their customer base from next to nothing in 2005 to 552,000 fleet vehicles this year in a very cost efficient manner. Leads are sourced through Web-based digital advertising, such as search engine marketing and optimization, email marketing, the company’s own website, and targeted outbound sales efforts. With an average cost of just $810 per subscriber, including $450 of customer acquisition costs and $360 variable costs, the economics work out well for FLXT—which helps the company obtain adjusted EBITDA margins in excess of 30%.
The stock had been on a wild ride for us, and when it fell back to levels where it had seen resistance in the past, I felt that additional near-term upside was limited, so we sold FLTX and pocketed our gains.
SMAC Stock #5
Total Systems Services (TSS), or more commonly known as TSYS, is a global payments solution provider that services financial and nonfinancial institutions. TSS supports a payment transaction nearly 49 million times a day and is divided into four categories: Issuing Services, Acquiring Services, Prepaid Services, and Merchant Solutions. Let’s take a closer look at each.
Issuing Services makes it possible for money to move between buyers and sellers. TSS provides consumer-related services to its clients’ customers and offers retail cards to those consumers that are most likely to use the clients’ products. This segment also supports business-to-business payment processing for corporations and government entities of all sizes, as well as a component for healthcare customers.
Acquiring Services processes billions of transactions annually to banks and other businesses. The company creates transaction processing solutions to help its clients manage accounts and convert customer credit card transactions into revenue quickly, safely and securely.
Prepaid Services are provided through the company’s NetSpend division, one of the country’s leading providers of reloadable prepaid cards for individuals and corporations. These services are provided through a distribution network of 85,000 employers and retail locations and 130,000 reload points. TSS works with Green Dot, the country’s largest prepaid card provider, to make it easier for retailers to sell to consumers the branded, prepaid cards that are quickly becoming a preferred payment method.
Merchant Services allows businesses to gain information about their customers and competitors, including reviews and ratings, as well as financial information such as revenue growth. This segment also includes simplified pricing packages that provide merchants with all the equipment they need to accept credit cards for a flat fee. Plans include cutting edge technologies such as mobile card readers and iPad point-of-sale (POS) solutions.
TSS’ goal is to stay in-step with game-changing technologies, and announced last September that it will support transaction for ApplePay. The company is also involved in the Big Analytics phenomenon. Last November, managementsigned an agreement with predictive analytics and software company FICO Corp. (FICO) to provide it with TSS’ targeted messaging to enhance cardholder communication and increase engagement. This targeted messaging is part of a series of analytics offerings the company intends to introduce this year.
After the stock popped on its strong second-quarter earnings results and traded just under our $48 target, giving us a near 26% return in just four months. I knew it was time for us to lock in our gains. I will be keeping an eye on this stock and may look to get back in if we can grab the shares at a cheaper price.
Sincerely,
Hilary Kramer
Editor, GameChangers