Reasons why I bought Gamma Communications shares

I have recently bought Gamma Communications shares. After doing research on a number of growth stocks the technology company came out as one of the best on a ranking system, followed by Judges Scientific, Belvoir, Sylvania Platinum. Incidentally, it’s very possible I’ll add all three of these shares at some point, although in the case of the former only if the price dips significantly.

Details of the trade

First of all in the interests of transparency below are the details of the first investment I made into Gamma Communications shares.

Purchase of Gamma Communications shares

As you can no doubt tell it is a modest starting position and makes it one of my smallest holdings. I do intend to scale my position steadily.  

Reasons why I bought Gamma Communications shares

Initially when I was screening growth shares Gamma Communications came out with the top score because it had a good history of revenue growth, strong returns on capital, good quick ratio, debt under control and a good valuation when measured by the PEG ratio.

The one big detractor for me was management shareholdings which don’t seem to be particularly substantial. As an aside I often find this and think it’s disappointing – but hey ho. Indeed, a non-exec director, Andrew Stone, has been substantially reducing his holding.

Despite this, reading through the latest annual report I was impressed. The Chairman’s statement was upbeat. Incidentally that is something that Lord Lee says to look for in an investment.

Richard Last, the Chair of Gamma Communications said:

“We believe that experiences learned from the COVID-19 pandemic will demonstrate the advantages of UCaaS to businesses of all sizes across all industries and we expect to see continuous growth in UCaaS product sales.”

UCaaS by the way stands for Unified Communications as a Service. In practice that means cloud-delivered unified communications model that supports six communications functions: Enterprise telephony. Meetings (audio/video/web conferencing) Unified messaging. Instant messaging and presence (personal and team).

The Chairman’s positive statement ties in with the market trends that could underpin sales and hopefully the share price as well. There’s undoubtedly an ongoing move to cloud based business communication services. Customers want to have multiple ways to contact companies, not just calls.

The technology company therefore has opportunities when it comes to developing new UCaaS products, developing its channel sales routes, and acquiring new tech and go to market channels.

Gamma Communications has 91% recurring revenue, great for a long-term investment. It’s also investing for growth with £12.9m of R&D spend in 2020, an increase of 14% on the previous year. A sure sign the pandemic didn’t particularly affect this business.

I think a catalyst for the shares is increased European and international expansion. Gamma at the time of the annual report had employees in seven countries. I’d think the trends that are helping them in the UK will also help them elsewhere as well. Expansion into Europe seems measured and is often done via acquisition.

The latest news from Gamma Communications also seemed positive and could help with the share price momentum.

In terms of red flags there’s the aforementioned low management holdings, there’s also a concern they may be relying on acquisitions for growth rather than achieving organic growth. The £40.2m paid for Mission Labs feeds into this concern for me. The January trading statement showed Gamma Communications spent £48m acquisitions.

What does Stockopedia show?

Post buying the shares I’ve signed up to Stockopedia. It has given me further confidence in the shares. Stockopedia rates Gamma Communications shares as “high flyer”.

Gamma Communications Stockopedia ranking

The value of the shares looking forward is the obvious concern highlighted. According to Stockopedia, the Value Rank is a ranking system based on an equal weighted blend of traditional value ratios including the P/B, P/E, P/S, P/FCF, Earnings Yield and Dividend Yield.

Based on my own analysis pre-Stockopedia I’m comfortable with the valuation of the shares.

It’s the metrics around quality that I’m most interested in as this will be a long-term investment. Here if I ignore how Stockopedia calculates quality and just look myself it’s possible to see a strong and growing operating margin and return on capital employed. This is what I want to see in most, if not all, my investments.

So, all in all, it’s very likely I’ll add to my position in Gamma Communications in the coming months. It’ll be a long-term hold and therefore I have no target price.

Next I’ll be looking at small caps shares, using Stockopedia to help me decide what to invest in. Sylvania Platinum is coming up on a lot of stock screens as well as scoring highly in my comparison of growth shares, so it could well be my next purchase.

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