(07/13/12) 3 Hot British Tech Stocks

Tech is a lot bigger than Silicon Valley, and the British have produced some very innovative companies in recent years. Here are few that may be hitting it big soon, reports the staff at Motley Fool UK.

For some time now, investing focus has been on safe, dividend-paying shares. That makes sense, because bearish times and poor economic conditions are not ideally suited to classic growth investing.

But in recent weeks, I’ve been seeing companies looking like high-tech growth prospects. They bear some similarity with ARM Holdings (London: ARM) and Autonomy—the latter having been sold for big money to Hewlett-Packard (HPQ).

ARM started off with a novel business model of designing chips and licensing the production to others, and its valuation on conventional measures was up in the sky. But ARM has gone on to make lots of money for its shareholders, and is now in the top half of the the FTSE-100, valued at more than £7 billion.

So where are the next generation of ARMs? Today, I’m looking at three promising looking growth prospects with interesting technology.

Video Search
Blinkx (London: BLNX) is valued at around £140m, and develops video search software, which is in demand from advertisers and other media companies.

Blinkx floated on AIM in May 2007, and didn’t have much trouble raising the capital it needed. Today, its technology is being used by more than 800 partners in various parts of the online media business.

Searching is a surprisingly tricky business, and Blinkx’s software uses clever stuff like speech recognition and video analysis. That’s all augmented by search and analysis technology licensed from Autonomy, which is arguably the best in the business. It’s a perpetual license, too, so the Autonomy cleverness is there for good. If anyone else wants to come along and compete, Blinkx’s stuff is protected by 111 patents.

Blinkx is already profitable, and while forecasts for 2013 are pretty flat, they spike upwards quite seriously for 2014—the future is where the serious money will hopefully be.

Thanks to the shares falling from 2011’s high point of 158p to around 40p, you can get them on a prospective price-to-earnings of 28 for 2013, falling to just 11 on 2014 forecasts.

Don’t Just Stand There!
Innovative success often comes from using technology for solving mundane problems, like standing in queues. And that is a bane for theme park operators—they’d much rather have people walking round spending money than standing idle in line.

What if you could pick up a little magic box, book your rides and have it stand in a virtual queue for you while you’re free to go do other stuff—then alert you when it’s your turn on the rides?

That’s what Lo-Q (London: LOQ) does, and it’s renting out its "Q-Bot" technology to the likes of Six Flags Over Georgia theme park, Dollywood, and Legoland. And that really should be just the start.

The firm made £2.7 million in pre-tax profit in 2011, with £3.4 million and £3.7 million forecast for this year and next, respectively. The price has admittedly flown, from 16.5p in 2008 to 327p today. But the shares are still on a P/E for 2013 of 22—many growth companies were on much higher ratings at this stage in their lives.

Printing Is Everywhere
I like the look of Xaar (London: XAR), the world’s largest independent supplier of industrial printheads. Though it’s not a recent startup, Xaar is showing signs that it’s currently in a growth phase.

In addition to paper and card, Xaar’s technology is used for printing on ceramics, laminates, and other materials, and for applications like high-resolution and high-color-density graphics, packaging, bar codes, and other markings. And it’s also used in industrial processes where the squirting of tiny drops of fluids is needed.

The shares haven’t moved much lately, despite a doubling of earnings per share in 2011, and very strong forecasts for 2012 and 2013. On this year’s estimates, the 230p shares are on a forward P/E of 16, falling to 12 next year. That produces PEG ratios of 0.37 for both years, which is well within classic growth desirability (Jim Slater has always looked for 0.7 or less).

I also looked at a competitor to Xaar, Domino Printing Sciences (London: DNO), which I also think is attractive, but Xaar’s forecasts make it my choice of the two.