Top Picks 2018: Luxoft Holdings (LXFT)

01/09/2018 5:00 am EST

Focus: TECHNOLOGY

Peter Mantas

CIO, Logos LP

Luxoft Holdings Inc. (LXFT) is a top pick for 2018; there are very few small cap enterprise technology stocks in a transition mode that generate significant amounts of cash, notes Peter Mantas, a value-focused money manager and editor of Logos LP Blog.

The company is still reeling from its expiring contracts at UBS and Deutche Bank but new growth in key sectors such as automotive, telecom and healthcare are propelling top line growth, with revenue rising double digits year over year.

Operating margins have declined during its transition period but this will start to tick up over time off higher gross margins and increased revenue from these key markets and new strategic accounts.

The company spends very little on cap ex from sales and operating cash flow (around 3%) and continuously generates double digits ROIC (return on invested capital) despite this transition.

Over the last quarter, the company has grown revenue by 16.07%, operating income by 13.66%, and EPS by 12.50% all the while the company is trading at 15.8 times forward earnings. 

With the Fed expected to tighten quickly over the next couple of years, we also look for companies that have fallen out of favor that have very little debt and generate significant levels of cash with the expectation of paying down debt or tempering aggressive growth.

As such, we favor a stock like Luxoft, which has a zero level of debt. We think that this will play a huge advantage for 2018 and beyond. 

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