Investment: New economy is key

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The Independent Online
I WAS struck by an expression used in a highly successful American newsletter specialising in technology stocks. It advised subscribers that the best place for their money was in the stock market backing managements participating in the 'new economy' of computers, electronics, communications and healthcare. It went on to advise that the 'old economy' of automobiles, commercial real estate, retail and energy should be avoided. In America, the new economy is 40 per cent and growing, the old economy 60 per cent and shrinking.

On 18 February, I recommended the purchase of shares in Amersham International, which earlier this week announced the acquisition of United States Biochemical for up to pounds 48m in cash and shares. USB, founded 20 years ago, makes enzymes that genetic researchers use to determine DNA sequences. Very much part of the new economy.

Another of my favourites is Sage, which is engaged in the development and publication of business software such as accounting systems for use on personal computers. The company also sells computer stationery and supplies and has subsidiaries in the UK, France and the USA. Sage's spectacular earnings per share growth over the past five years is shown in the chart.

The consensus estimate for the year ending next September is that there will be a further increase in earnings per share of 18 per cent to 36.5p. At the present price of 567p, the prospective price-earnings ratio is therefore 15.5. The p/e growth factor (the price you pay for growth, established by dividing the growth rate into the prospective p/e ratio) is therefore an attractive 0.86 compared with the market average for leading growth stocks of 1.2.

By this comparison, Sage is even better than it might appear at first sight, as the company is half way through its financial year. When calculating the average of 1.2, the figures were, with very few exceptions, based on earnings and p/e ratios a full year ahead.

Sage's success is based on excellent commercial management, the frequent introduction of new products and astute complementary acquisitions, usually made for cash. One of these acquisitions, Mainlan, did not work out, so last year the company closed it down at a loss of pounds 420,000. However, the upside potential can be tremendous. An excellent recent example of an acquisition is Remote Control International of California, a large supplier of sales automation software used for controlling client or sales contacts and order processing. The market for sales automation software is forecast to rise from about dollars 160m ( pounds 110m) to dollars 2.5bn by 1997.

Sage's main interest in the US is DacEasy, one of the leading brands. A new product, Sterling+2, will operate under both DOS and Windows applications. The lower end of the American market might become even more competitive and this is a possible cause of worry. Against that, American profits will benefit from devaluation, as they will in France, where Sage's subsidiary is in a similar position to Sage itself in the UK five years ago.

Sage is capitalised at pounds 116m. The net assets are only 26p per share, but the price is earnings-based and the company has no debt - in fact year- end cash was over pounds 7m.

Sage's dividend yield is just over 2 per cent but, like the company's earnings, seems to increase each year. I believe that Sage is an excellent example of a new economy company. The shares seem to me to be underpriced and should be a rewarding long-term investment.

The author is an active investor who may hold any shares he recommends in this column. Shares can go down as well as up. Mr Slater has agreed not to deal in a share within six weeks before and after any mention in this column.

(Graphs omitted)

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