How I pick stocks in the technology sector

Pakistan Stock Exchange has many good listed companies; however, we have to pick excellent businesses that are neither cyclical (e.g. automobile sector) in nature nor commodity businesses (e.g. sugar mills, steel producers, oil and gas companies).

The technology sector in Pakistan has achieved consistent and consecutive year-on-year growth that can be the envy of any industry anywhere in the world and is a superstar on its way to possibly becoming the largest foreign exchange earner for Pakistan.

This sector is important to be included in an investor portfolio to the extent determined by the risk appetite of the person. The following Companies are prominent businesses in this sector:

Avenceon Limited – Automation solutions

Netsol Technologies Limited – Software Solutions

Octopus Digital Limited – Digital services

Systems Limited – IT Services

TRG Pakistan Limited – IT Services

These are good companies that have been doing very well in terms of business but my preference would be to select the excellent companies from the league from a stock investing perspective. Let’s start the journey.

The first thing is to look at is earnings of the companies, their consistency/predictability,  and rising trend. The first filter is to exclude the companies that have not earned profits persistently during the last 5-10 years.

For example, TRG has suffered losses for the last three years. It has made losses in four out of the last 10 years. It scores low on predictability and a rising trend in profits.

Then comes the Return on Equity (ROE) ratio. We gather from a high ROE ratio, that the Company is generating strong earnings relative to its shareholders’ equity base, making it an attractive investment for those seeking high-growth opportunities. This metric, i.e. ROE, also reflects management’s ability to reinvest profits effectively, ensuring long-term value creation for shareholders.

For example, AVN, NETSOL, OCTOPUS, and SYS have decent ROE ratios (greater than 15-20%). NETSOL has comparatively lower ROE (still a high percentage) among these companies. These four companies make an investment case for long-term investors.

I have presented my detailed investment case for Systems Limited in my article Why I like Systems Limited (SYS).