Last Tuesday, I told you we have to start getting “choosier” about our stocks to buy.
And I told you I’d be back soon with a prime choice.
Today, I’m keeping that promise.[ad#Google Adsense 336×280-IA]The roller-coaster market we’ve seen over just the past week – though, really, it’s been with us all year long – brings with it great buying opportunities for tech investors.
The earlier rallies that were making some stocks so expensive are largely gone. One of my main jobs here is to help you make good choices when others are panicking.
So today, we’re “putting our best foot forward” by taking a look at a tech leader well off Wall Street’s radar (they think it’s merely a “software” company).
I’m talking about quick triple-digit gains – and it’s on sale…
Getting Choosy About Stocks to Buy
Now, the situation is a bit different than it was the last time we spoke.
We had just come off the largest ever intraday point swing in the Dow Jones Industrial Average – when, on Monday, the index whipsawed 1,089 points. That day also saw one of the largest-ever daily point losses – and we witnessed another big loss on Tuesday.
Then, last Wednesday and Thursday things came roaring back.
While the worst of it may be behind us, we don’t know for sure. And the markets are still significantly down so far this year – 7.2% for the Dow and 4% for the Standard & Poor’s 500 Index.
Now, the challenge is to avoid getting complacent because the markets look good again – or paralyzed because you’re afraid of what’s going to happen next.
After all, the S&P 500 brought us gains of 31% in 2013 and 13% in 2014. And since the bull market began in March 2009, it’s up 170%.
This is not the kind of buoyant market in which a rising tide lifts all boats, and that’s what makes good stock selection – making good choices – so imperative.
We’re now going through a “flight to quality” in which we’re looking for companies that will outgrow the economy and post solid fundamentals.
In a market like this, we need to consider paying a premium for those best choices.
Take the case of The Ultimate Software Group Inc. (Nasdaq: ULTI).
With an estimated 6% to 8% share of its $11 billion market, this is one of the best specialized plays investors can make on the burgeoning cloud-computing sector.
Our Best Choice Is in the Cloud
Ultimate is a leader in a field known as human capital management (HCM). It offers a wide range of tools for human resources departments at firms with both hundreds and thousands of employees.
Its main product is UltiPro, a cloud-based platform that manages the employment life cycle from recruitment to retirement. It’s a managed suite of services that covers payroll, tax withholding, health services, and retirement accounts.
That puts Ultimate in a cloud sector known as Software as a Service, or SaaS. For SaaS services, International Data Corp. estimates annual growth of 18% through 2018, when the market will be worth $50.8 billion.
And according to the forecasters at MarketsandMarkets, the HCM market is growing at a 9.8% compound annual growth rate from $10.96 billion in 2014 to $17.49 billion by 2019.
Now, just because a stock is “on sale” – and Ultimate is nearly 10% off its highs – that doesn’t alone make it a good “Buy.”
It still needs to meet all five mandates of Your Tech Wealth Blueprint – our guide to finding quality stocks that you can use to build your long-term wealth.
Let’s see how Ultimate Software stacks up…
Rule No. 1: Great Companies Have Great Operations
We always look for well-run firms with top-notch leaders.
Ultimate CEO Scott Scherr formerly worked as an executive at payroll management firm Automatic Data Processing Inc. (Nasdaq: ADP). He founded Ultimate Software in 1990 and took it public in 1998.
Today, the firm has more than 2,800 customers with employees in 160 countries. It hosts more than 20 million human resources records in the cloud.
It’s won a string of impressive awards. This year, the firm ranked seventh on the list of Most Innovative Growth Companies as compiled by Forbes. And for the second year in a row, it made the 2015 InformationWeek Elite 100, a list of the top business technology innovators in the United States.
Rule No. 2: Separate the Signal from the Noise
To create real wealth, you have to ignore not just hype from the company, but also the noise coming out of Wall Street.
This is one of those rare cases when the company’s name actually works against it, creating a bit of “negative hype.”
The use of the word “software” – a somewhat stagnant business – makes it easy for investors to miss the fact that Ultimate is really a play on two of the biggest growth sectors out there – SaaS and cloud computing.
Rule No. 3: Ride the Unstoppable Trends
We look for stocks in red-hot sectors because they offer the best chance for market-beating gains.
I’ve already shown you how Ultimate is a big play on the growth field for cloud-based HCM tech tools. But it also stands to gain from the continued globalization that shows no signs of slowing down.
Citing data compiled from multiple surveys, Ultimate says 85% of global firms believe their payroll practices need improving and 71% are managing teams across borders more often.
Of those responding, 58% say they are putting new policies in place to deal with their growing global workforce. And one out of four businesses cited incorrect tax withholding as a frequent mistake.
Having personnel tools in the cloud makes it that much easier for firms to manage global workforces, which bodes well for Ultimate’s continued expansion.
Rule No. 4: Focus on Growth
Companies that have the strongest growth rates almost always offer the highest stock returns.
Last year, Ultimate booked a little more than $500 million in revenue. But it’s forecasting that sales will double to $1 billion by the end of 2018. And it has the track record to back it up.
Ultimate has grown recurring revenue by at least 25% per year for 14 straight years. Over the last several years, it has consistently grown sales by 20% or better.
In the second quarter, sales jumped 22% from the prior year, topping consensus forecasts. And non-GAAP income increased 37% to $18.4 million.
Rule No. 5: Target Stocks That Can Double Your Money
This is where we look at earnings projections and see how long it will take the firm to double profits. By doing that, we can figure out how long it will take for the stock to double.
I’ve gone through the firm’s financials, and I’m projecting earnings per share will grow an average of 22%. That’s a conservative figure – half its actual growth rate over the last three years.
Now, we use what I call my Doubling Calculator. Divide the compound growth rate of 22 into the number 72. We find that it should take a little more than three years for ULTI stock to give us 100% gains.
Ultimate trades at $190, giving it a $5.4 billion market cap. It has 8% operating margins and a 15% return on equity. Over the past year, it has gained 28%, more than five times the S&P 500’s 5% return.
In other words, Ultimate is the ultimate post-sell-off foundational play. That’s why it’s our first “choice” when it comes to giving your portfolio a solid base in a choppy market.
— Michael A. Robinson[ad#IPM-article]
Source: Money Morning