[Just beginning your investing journey? Check out our guide on how to start investing in the UK.]

ASOS

What it does: ASOS is an online fashion retail firm, comprising 17 different brands. It operates around the globe.

By Andrew Woods. My growth stock pick for October is ASOS (LSE:ASC). For the years ended August, between 2017 and 2021, earnings per share (EPS) rose from 77.2p to 128.9p. Over this period, the company had a compound annual EPS growth rate of 10.8%. I consider that to be consistent and strong.

However, ASOS has been operating in a challenging environment for the retail sector more generally. As the cost-of-living crisis has hit, customers have had less disposable income to spend on clothes. Inflation has also led to shrinking profit margins, as wages and costs increase. The share price reflects these problems, having fallen 82% in the past year.

Despite this, sales improved during the summer and the business expects full-year profits to be within the initial guidance range. Another indication that the company is in decent financial shape is its low levels of debt. This means it’s potentially well placed to work on expansion as we emerge from the pandemic.

Andrew Woods has no position in ASOS.

Kainos Group

What it does: Kainos is an IT support services business that helps companies, organisations and governments digitalise operations.

By Zaven Boyrazian. Kainos Group (LSE:KNOS) helps its clients digitalise operations and deploy Human Capital Management solutions through its partnership with Workday. The group serves the public and private sectors, with its most prominent collaboration being with the National Health Service.

Despite record double-digit organic sales growth, the stock has lost nearly a third of its market capitalisation in the last 12 months. It seems the recent drop in profit margins has spooked some investors. And given that the stock trades at a lofty premium of 47 times earnings, this volatility isn’t surprising.

The drop in profitability comes from the steady decline of pandemic tailwinds rather than internal issues. Meanwhile, demand for Kainos’ services continues to grow with a record level of bookings at £349.8m.

While it’s frustrating to see profitability wobble, the underlying business remains uncompromised. And with an impressive amount of potential, I believe the recent downward trajectory presents an attractive buying opportunity, even if the stock still looks expensive.

Zaven Boyrazian does not own shares in Kainos or Workday.

Halma

What it does: Halma is a collection of businesses focused on industrial safety, environmental monitoring, and life sciences.

By Stephen Wright. I’ve been buying shares in Halma (LSE:HLMA) over the last month. So I’m putting my money where my mouth is on this one. 

The reason I’ve started investing in this stock is that I think that it’s finally trading at an attractive price. The company has always looked great but expensive to me.

Halma has a straightforward business strategy. It attempts to acquire businesses and use the cash they generate to buy more businesses.

The company also has a decentralised corporate culture. In other words, it leaves individual businesses to get on with what they do well. 

Halma’s share price fell below £20 per share recently. At those prices, I think that it’s a terrific buy.

If the stock reaches that price again in October, I’ll be looking to increase my investment significantly. But I think Halma is a great company that I’m happy owning shares in.

Stephen Wright owns shares in Halma.

Spire Healthcare 

What it does: Spire Healthcare provides private healthcare services in the UK through 39 hospitals and eight clinics. 

By Royston Wild. The resilience of healthcare-related spending means stocks like Spire Healthcare (LSE: SPI) are popular picks during tough economic times like these.

Theoretically, Spire’s turnover might suffer as Britons start to feel the pinch. As times get tough, people could be tempted to wait that bit longer for treatment and get it for free on the NHS. 

But the size of NHS waiting lists today means that demand for private care continues to rise strongly. At Spire, revenues rose 7% in the six months to June as private revenues jumped almost 22% year on year.

A record 6.8m people were on NHS waiting lists in September. And the Institute for Fiscal Studies thinks the number will get worse before it gets better, possibly even hitting 10.8m people in 2024 before slowly falling. 

This explains why City analysts think Spire will report healthy earnings growth over the short-to-medium term. It’s expected to flip from losses of 7.1p per share in 2021 to earnings of 4.4p this year. And in 2023 earnings are tipped to double to 8.8p. 

Royston Wild owns shares in Spire Healthcare. 

Scottish Mortgage Investment Trust

What it does: Scottish Mortgage Investment Trust is one of the world’s biggest and most famous trust funds. The Baillie Gifford & Co fund invests globally and looks for strong businesses with above-average returns.

By John Choong. While Scottish Mortgage Investment Trust (LSE: SMT) has performed atrociously thus far this year, investors are told to expect a five-year return. As such, the current drop could pave way for a monumental recovery when the global economy eventually recovers.

The trust’s top holdings are mostly growth stocks, with the likes of Moderna and Tesla having plenty of upside to their earnings over the next decade, and could help boost the share price. Additionally, Scottish Mortgage has quite a healthy exposure to China. As the second largest economy in the world reopens from its Covid-19 lockdowns, Chinese equities are seeing steep rebounds, and Scottish Mortgage is expected to benefit from that to some extent.

Either way, with its share price down nearly 50% from its all-time high, this could be an opportune time for me to start a long-term position in a fund with historical success. That being said, investors should be wary that further lockdowns in China could prolong its road to recovery.

John Choong has no position in Scottish Mortgage Investment Trust.

Smithson Investment Trust

What it does: Smithson is a global investment trust run by Fundsmith. It invests in high-quality, small- and mid-cap growth stocks.

By Edward Sheldon, CFA. Smithson’s (LSE: SSON) share price has taken a big hit in 2022 as growth stocks have fallen out of favour and I think this has presented a buying opportunity. Currently, the investment trust is trading at a significant discount to its net asset value (NAV).

I like Smithson’s approach to investing. Like its big brother, Fundsmith Equity, it typically invests in companies that are highly profitable. Meanwhile, it avoids companies that are heavily leveraged, as well as those in industries that are rapidly changing. Names in the portfolio at the end of August included UK property website powerhouse Rightmove, medical technology company Masimo, and cybersecurity specialist Fortinet – all great companies.

It’s worth pointing out that the Smithson portfolio is quite concentrated. So, stock-specific risk is quite high. If a handful of stocks in the portfolio were to underperform, overall performance could be impacted significantly. I’m comfortable with this risk, however. I think Smithson is a good way to get exposure to smaller growth companies listed internationally.

Edward Sheldon has positions in Smithson Investment Trust, Rightmove, and Fundsmith Equity.

Hargreaves Lansdown

What it does: Hargreaves Lansdown is a United Kingdom-based digital wealth management service administering company.

By Paul Summers: The share price of Hargreaves Lansdown (LSE: HL) has been in awful form in 2022 and it isn’t hard to fathom why. 

At a time when most people are just trying to pay their energy bills, it was inevitable that revenue at the company would suffer. Combine this with a reduction in new business and assets under administration and the 35% fall, while severe, makes some sense. 

Even so, I do think this is shaping up to be an attractive contrarian play. A price-to-earnings (P/E) ratio of 17 isn’t screamingly cheap but it does seem a very enticing price for a company that generates some of the highest margins in the FTSE 100. Moreover, the desire of many to take more control over their finances will surely prove a decent growth driver for years to come. 

In the meantime, there’s a 4.7% forecast yield in the offing.

Paul Summers has no position in Hargreaves Lansdown

IT services

As a quick introduction, Kainos provides information technology services to its customers in the private and public sectors. The business operates via two divisions, which are Digital Services and Workday Practice. The former operates around development of software and other digital solutions and the latter around cloud-based software for human capital management, financial management, and planning.

So what’s the current state of play with Kainos shares? Well, as I write, they’re trading for 1,463p. At this time last year, the stock was trading for 1,780p, which is a 17% drop over a 12-month period.

UK shares have risks

Kainos helps lots of key public and private sector clients, and many governments too. A big risk that any software provider faces is that of cyber security threats. These threats come in many forms, such as hacking, loss of data, or even breach of data protection. If a security breach were to occur, the organisation using the software could suffer but the software provider, in this case Kainos, could suffer from reputation, financial, and even legal repercussions. I would also imagine the share price and investor sentiment could be negatively affected too.

Despite Kainos shares dropping in recent months, the shares do also look a tad expensive to me on a price-to-earnings ratio of close to 48. This makes me question if growth could already be priced in. Furthermore, if I were to buy shares right now, would I be getting value for money?

The investment case

Moving away from the bearish aspects, let’s look at some positives. Firstly, I am impressed by Kainos’ client list. It has several government contracts, which tells me two things. Firstly, governments trust Kainos’ offering to help them adopt digital technology, which I think is a ringing endorsement. Second, government contracts often run for a long period, which means this is consistent and recurring revenue for Kainos.

Next, the tech market in general is a growing one, especially when it comes to digital solutions and adopting a digital approach. I also believe the pandemic sped up digital adoption for businesses and consumers alike. This should benefit Kainos, and many other UK shares, and could support future growth too.

Let’s look at Kainos’ performance then. I am aware that past performance is not a guarantee of future performance, however. Looking back, I can see Kainos has impressively grown revenue and profit for the past four fiscal years.

Finally, consistent performance can lead to investor returns in the form of dividends. Kainos shares tick this box here through dividend payments. At current levels, Kainos’ dividend yield stands at 1.5%. This is a little below the FTSE 250 average of just under 2%. I wouldn’t be surprised to see this increase in the future as performance and growth continues. I am conscious that dividends are never guaranteed, however.

Overall, I like Kainos shares and would be willing to add some shares to my holdings. I believe it is one of a number of UK shares that fit my investment strategy of growth, while providing consistent returns for my portfolio in the long term.

[Just beginning your investing journey? Check out our guide on how to start investing in the UK.]

FRP Advisory 

What it does: FRP helps businesses in economic trouble by providing advice on restructuring, debt and pensions.

By Royston Wild. Finding solid growth stocks to buy is becoming increasing challenging for UK investors. Inflation is soaring and economic growth is stalling, putting corporate profit forecasts under increasing strain. 

But FRP Advisory Group (LSE: FRP) is a stock that’s set to benefit from these deteriorating conditions. The business provides a range of advisory services to companies in financial distress, the number of which is soaring in Britain. Higher interest rates mean that businesses are struggling to pay their debts.

According to tax, audit and advisory firm Mazars Accountants, the number of corporate insolvencies has rocketed 70% over the past year, to 19,191. Unfortunately it has warned, too, that “the dismal outlook means more pain for businesses is likely.” 

FRP’s share price has slumped more recently. This is because of rising costs that caused profits to fall in its latest financial year (to April 2022). 

I consider this to be a great dip buying opportunity and expect FRP’s shares to bounce back as trading activity gathers momentum. Revenues at FRP leapt 21% year-on-year in fiscal 2022, and rose 11% on an organic basis. 

Royston Wild does not own shares in FRP Advisory. 

Kainos

What it does: Kainos is a technology company that helps public and private organisations with digital transformation.

By Edward Sheldon, CFA. Kainos (LSE: KNOS) shares have experienced a significant pullback this year as growth shares have fallen out of favour and I think this has created a compelling investment opportunity.

Kainos is benefitting as companies and government organisations embrace technology and this is reflected in the group’s financial performance. Last financial year (ended 31 March 2022), revenue was up 29%. Meanwhile, at the end of the period, the group’s contracted backlog was £260m – up 26% year on year.

Looking ahead, I’m confident that Kainos will continue to grow at a healthy rate. That’s because digital transformation can help organisations lower costs and beat inflation. It’s worth noting that CEO Brendan Mooney recently said that demand for the company’s services has “never been higher”.

Now, this growth stock isn’t cheap. Currently, its P/E ratio is in the high 20s. This adds risk to the investment case. However, I believe that long-term investors in the company, like myself, will be rewarded over time.

Edward Sheldon owns shares in Kainos

dotDigital

What it does: dotDigital is a SaaS company providing an omnichannel marketing automation and customer engagement platform.

By Zaven Boyrazian. The technology sector hasn’t had much love in 2022. Yet, despite the volatility, there remain plenty of attractive opportunities for my portfolio. One that’s caught my attention at the moment is dotDigital (LSE:DOTD).

With the tailwinds from the pandemic slowing down, top-line growth followed suit, upsetting quite a few momentum investors. Yet even without these catalysts, revenue continues to expand at a respectable rate. Meanwhile, its latest trading update showed a 16.8% jump in average revenue per customer.

In other words, clients are spending more money on the firm’s marketing platform. And even with an uncertain economic outlook, marketing email volumes are up 22% to 29.4 billion versus a year ago. This all bodes well for the company, especially given its fierce competition from alternative platforms.

Pairing this with a seemingly cheap valuation makes dotDigital look like an excellent growth addition to my portfolio this month.

Zaven Boyrazian owns shares in dotDigital.

Domino’s Pizza

What it does: Domino’s is a UK-based pizza delivery company and FTSE 250 constituent.

By Paul Summers: At the time of writing, shares in Domino’s Pizza (LSE: DOM) are down by over a third in 2022. That’s not entirely surprising. The squeeze on discretionary income was never likely to be good news for the firm. 

For a long-term growth investor like me, however, this is looking like an opportunity to acquire the stock at a cheaper-than-usual valuation. A forecast price-to-earnings (P/E) ratio of 14 for the current year is below the 5-year average of 16. There’s also a 3.5% dividend yield to reinvest while I wait.

I’m not expecting a rip-roaring recovery in earnings over the next year or so. Nonetheless, decent interim numbers at the beginning of August coupled with encouraging news on the search for a new CEO could herald a change in market sentiment.

Paul Summers does not own shares in Domino’s Pizza.

Safestore

What it does: Safestore is a leading provider of self-storage facilities in the UK and Continental Europe

By Christopher Ruane. I continue to see value in Safestore (LSE: SAFE). Its shares are down 20% since April, although they are still 7% ahead of where they were this time last year.

In the first half, revenue grew 15% compared to the same period last year, diluted earnings were up 67%, operating cash inflows grew 25% and the dividend also grew 25%.

That is excellent growth – and I expect more of the same in future. Self-storage remains a fairly undeveloped industry in the UK compared to the US, for example. I see lots of space for growth. Safestore’s strong brand and proven operating model could help it capitalise on that. One risk I see is competitors trying to woo customers with low prices, pushing down profit margins across the industry.

But I think Safestore has a great, simple formula in a market with strong long-term growth prospects.

Christopher Ruane owns shares in Safestore.

CMC Markets

What it does: CMC Markets specialises in online trading, providing exposure to a range of different asset classes. It has a global presence.

By Andrew Woods. A glance at the historical earnings data for CMC Markets (LSE:CMCX) immediately indicates rapid growth over the past five years. For the year ended March, between 2018 and 2022, earnings per share (EPS) rose from 17.3p to 24.8p.

By my calculations, this results in a compound annual EPS growth rate of 7.5%. For me, I find this attractive in a growth stock. Over that time period, revenue also grew from £209m to £325m.

It’s quite clear that the firm benefited from increased trading activity during the pandemic. As customers enjoyed greater disposable income and had more time to devote to investing, the business saw its profit surge. What’s more, greater volatility in the stock market enabled the firm to derive more income from price spreads.

However, revenue fell by around £100m between 2021 and 2022, suggesting that customer interest and activity may have declined following the pandemic. Nevertheless, revenue and pre-tax profit are still higher than pre-pandemic figures.  

Andrew Woods has no position in CMC Markets.

I don’t know when the stock market will recover. But history tells us that at some stage in the not-too-distant future it will, pushing share prices higher. With that in mind, here are three stocks I’d buy for my portfolio before the market rebounds.

This FTSE 100 stock looks cheap

One stock I certainly think has a lot of rebound potential is retail giant JD Sports Fashion (LSE: JD). Its share price has taken a huge hit this year on the back of recession fears and I expect it to bounce back at some stage.

The reason I’m bullish here is that in past economic downturns, spending on athletic footwear and leisurewear has been quite resilient. In the Global Financial Crisis of 2008/2009, for example, JD actually grew its revenues significantly.

Meanwhile, after the recent share price fall, the stock now looks very cheap. At present, the forward-looking P/E ratio here is under 10. That seems too low to my mind, given the company’s track record and growth prospects.

Of course, if consumers do rein-in their spending dramatically due to the cost-of-living crisis, JD could be impacted. However, with the stock trading at such a low valuation, I think the risk/reward profile is favourable for me.

A ‘no-brainer’

Another stock I’d buy before the market rebounds is US-listed payments giant Mastercard (NYSE: MA). Mastercard shares seem like a no-brainer to me right now. For starters, the company is a beneficiary of inflation. As prices rise, so do its revenues, as it takes a cut of every transaction it processes.

Secondly, if we do see a recession, consumers are likely to turn to credit cards. In this scenario, Mastercard is likely to benefit.

However, Mastercard isn’t the cheapest stock around. Currently, it has a P/E ratio of about 30 (25, using next year’s earnings forecast), which adds some risk. However, I’m comfortable with that valuation, given the fact that, in the decade ahead, trillions of transactions are set to shift from cash to card.

An under-the-radar growth stock

Finally, I’d also buy shares in Kainos (LSE: KNOS) today. It’s a FTSE 250 technology company that helps organisations with digital transformation. Like many other technology stocks, its share price has taken a big hit in 2022.

Kainos has now registered 12 consecutive years of growth, with revenue growth in its last financial year (ended 31 March) coming in at a very impressive 29%. And, looking ahead, I expect the company to continue growing as businesses realise the importance and benefits of digital transformation (digitalisation and automation can help offset inflation).

It’s worth noting that in the company’s recent full-year results, the contracted backlog was up 26% to £260m. Meanwhile, CEO Brendan Mooney said that demand for the company’s services had “never been higher”.

I’ll point out that if the technology sector continues to underperform, Kainos shares could produce disappointing returns. I’m willing to take on this risk though. With the stock currently trading on a P/E of around 27, I’d be comfortable buying it for my own portfolio today.

Here’s how I’d invest £1,000 if share prices tank.

Defensive shares

Defensive stocks would be my first investments in a stock market crash. They’re more likely to deliver stable returns and reliable dividends during turbulent economic times. This is where the FTSE 100 index showcases strength with a wide selection of defensive equities among its constituents.

I’m particularly drawn to utilities stock, SSE (LSE: SSE). The energy company marries a cheap price-to-earnings (P/E) ratio of 7.82 with a respectable 4.27% dividend yield. An attractive combination.

Shareholders may be concerned by Treasury plans to impose a windfall tax on electricity generators’ £10bn excess profits, including wind farm operators. This is a potential headwind to further growth in the SSE share price, which is up 25% over 52-weeks.

However, the policy’s precise impact remains to be seen. On balance, I think this stock could be a good buy for me in a stock market crash.

I’d also seek to diversify my defensive stock purchases into other market sectors. For example, drinks giant Diageo (LSE:DGE) is a Footsie stalwart that’s significantly surpassed its pre-pandemic high. The Diageo share price is down 11% this year. Further selling in a stock market crash could present an attractive buying opportunity in my view.

The company’s consistently distributed dividends to shareholders for over two decades, even throughout the Global Financial Crisis. Coupled with an impressive history of index-beating returns, I regard Diageo shares as quality investments despite the expensive P/E ratio of 28 that represents a risk.

Growth stocks

It’s harder to identify growth stocks I’d buy without knowing the dynamics of the next stock market crash. But bargains can always be found amid the chaos of a bear market. I’d devote a portion of my total investment to snapping up cheap shares with strong growth potential.

One candidate I have my eye on is FTSE 250 tech stock Kainos (LSE: KNOS). The Belfast-based business specialises in digital transformation, counting the NHS and Home Office among its clients. Kainos also partners with Workday on consulting and software solutions.

The Kainos share price has taken a beating this year — it’s down 31.5%. The stock also isn’t cheap at a P/E ratio of 38.48, which again, is a risk. However, Kainos recently posted encouraging financial results for FY22. Revenue was up 29%, breaking the £300m barrier, and the company posted a 3% uptick in adjusted pre-tax profit.

I view any further heavy selling in Kainos shares as a gift to establish a position in a company with a bright future.

Why I’m not worried about a stock market crash

Bear markets form a natural part of the boom and bust cycle. Past performance doesn’t guarantee future results, but patient investors have been rewarded historically by adopting a long-term buy-and-hold approach.

If the stock market crashes, I’d invest £1,000 into a blend of defensive stocks and beaten-down growth stocks with a view to securing good returns in years to come. Bargain hunting when stocks go on sale is one reason I maintain a healthy cash position in addition to the peace of mind during periods of elevated share price volatility.

I think I should focus on these steady growth stocks right now rather than chase the next big penny stock. And two beaten-down growth stocks from my watchlist look very cheap and could be great long-term prospects for my portfolio.  

Tech growth stock down 41%

Software firm Kainos (LSE: KNOS) is a service provider to private and government organizations. The company specialises in data aggregation and AI-related software services that help businesses streamline and organise data. And after the recent tech crash, its share price is down 41% in 2022.

But Kainos has been posting some impressive financials recently. In the interim report for the period ended September 2021, Kainos recorded organic revenue growth of 32%. The company increased its cash balance by 29% to £80m which prompted an 11% dividend hike to 7.1p per share. 

Its digital services business is growing at a compounded annual growth rate (CAGR) of 29% and its partnership with Workday Practices is growing at a CAGR of 49%. For a subscription-based service, its customer retention rate of 89% is very impressive too. The company is largely debt-free and is investing in promising R&D avenues.

Despite this strong showing, the tech sector does come with a few concerns. Despite the current drop in price, Kainos shares are still trading at a price-to-earnings (P/E) ratio of 32 times, which is high. Another concern is that businesses may cut external services to save costs during periods of inflation. 

But Kainos has a strong business model and looks like one of the top growth stocks on my list. The company has promising partnerships with the UK government and private sector firms. And I would be tempted to make an investment if the share price drops below 900p.

British pandemic superstar 

Plumbing firm Ferguson (LSE:FERG) grew immensely after the pandemic crash. Between April 2020 and December 2021, its stock jumped nearly 200%.

But as markets correct, Ferguson shares have gone down 27% so far in 2022 and are currently trading at 9,700p with a P/E ratio of 13 times. And I think now is the perfect entry point for me to invest in this excellent growth stock.

Recently released second-quarter (Q2) 2022 results look very impressive to me. The firm recorded strong sales growth of 29.1% and grew operating profits by 68.3%. In the three months ended 31 January 2022, the company recorded an operating profit of $555m. This is 74% higher than the corresponding period in 2021. The company also rolled out $417m of a $1bn share buyback program recently.

Fluctuating macroeconomic conditions and increased competition from smaller companies in the US and Canada are big concerns. Also, setbacks from halted development projects could dent future earnings. 

But the company remains one of the top growth stocks on my watchlist. It is available at an attractive price backed by strong recent financial performances, which is why I would consider an investment if prices drop further.

The good news for UK investors like myself is that there are plenty of top tech stocks on the London Stock Exchange that are benefiting from this digital revolution. With that in mind, here are three tech shares I’d snap up for my portfolio today.

Calnex Solutions

Let’s start with Calnex Solutions (LSE: CLX), which specialises in telecommunications network testing solutions.

Calnex has generated strong revenue growth in recent years and I expect its top line to keep climbing in the years ahead. That’s because the rollout of 5G network technology, along with the introduction of new technologies such as self-driving cars, will mean that networks need to be tested rigorously. According to Grand View Research, the market for 5G testing is set to grow by around 9% per year between 2020 and 2027.

Last month, Calnex posted an excellent trading update. Here, it advised that its order book was sitting at “record levels” and that the board was confident that the group can deliver “significant, sustainable growth” over the coming years. This is encouraging, to my mind.

One issue with CLX is that the stock has had a good run recently. So, it could experience a pullback in the short term. Over the long term, however, I think there’s a good chance it will deliver attractive returns.

Kainos

The next stock I’d buy is Kainos (LSE: KNOS), which helps organisations with digital transformation.

Kainos, like many other tech stocks, has underperformed in 2022 as investors have focused more on value. At the start of 2022, its share price was near 1,900p. Today, however, it’s close to 1,200p.

I see this decline as a great buying opportunity. Because nothing has really changed within the company. Indeed, last month, Kainos advised that trading for the year ended 31 March 2022 had been “very strong”. It added that it’s well-positioned for further growth due to its “significant contracted backlog”.

I’ll point out that even after the big share price pullback, KNOS isn’t cheap. Currently, the P/E ratio is about 30. This doesn’t leave much room for error. If growth was to stall, the stock could fall further. I’m comfortable with that valuation, however, as I think the growth potential here is significant.

Volex

Finally, I’d also buy Volex (LSE: VLX). It manufactures high-performance power cords and cables for a range of industries, including the electric vehicle (EV) market.

Volex has a lot of momentum right now. In a recent trading update, the group advised that revenue for the year ended 4 April is expected to be up 37% year on year while revenue in its EV segment had nearly doubled. It added that it was handling inflation and supply chain problems effectively.

Yet this momentum is not reflected in the share price or the valuation. Since September, the share price has fallen from 500p to 260p. Meanwhile, the P/E ratio now is just 11.5.

At that valuation, I see an attractive opportunity here. The stock could continue to be volatile in the short term, but I think in the long run, it could go much higher.

UK shares at the forefront of digital solutions

Kainos (LSE:KNOS) provides digital technology solutions to help organisations and their people to work smarter, faster, and better. The software firm can count many government departments among its customers, including the NHS. As well as the public sector, it also provides services to many private sector clients across multiple industries.

The Kainos share price looks good value for money to me right now. The shares are trading for 1,303p currently, but were 12% higher this time last year. More tellingly, the shares are down over 30% year to date. I’m considering buying the dip.

One of the primary risks to Kainos’s growth is the spectre of cyber security threats. Any breach could lead to huge financial and even legal consequences, especially as it helps those government departments with day to day operations.

Kainos shares pay a dividend with a yield of just under 2%. UK shares that help me build a passive income stream are an attractive prospect. And this one has a consistent track record of performance with clear evidence of growing revenue and profit consistently.

Most importantly for me, Kainos operates in a growth sector. The rise in technology adoption has led to lucrative opportunities for businesses like this.

Pick #2

Softcat (LSE:SCT) is an IT infrastructure specialist that sells the products of tech giants who don’t sell directly to businesses. It resells these products and services to public and private sector businesses across cyber security, IT intelligence, hybrid infrastructure and digital workspace tools divisions.

Softcat shares are trading for 1,513p as I write. They’re down 20% over a 12-month period from 1,897p. It’s one of a number of UK stocks in the tech sector that have seen share prices drop.

The valuation still looks a bit high to me with a price-to-earnings ratio of close to 29. If performance and growth ahead were to be affected, the shares could struggle. Furthermore, the IT reseller market is large and saturated. This competition could affect performance and returns.

Like Kainos, Softcat operates in a growth sector with numerous opportunities it can capitalise upon to boost performance and its bottom line. Its growth to date has been excellent and has been underpinned by consistent improving performance year-on-year. I do understand the past is not a guarantee of the future, however.

As a bonus, Softcat shares pay a dividend with a yield of close to 3%, which would help me boost my passive income stream.

What I’m doing now

I’d add Kainos and Softcat shares to my holdings at current levels. The primary factor is that both businesses operate in a growth sector. Furthermore, both pay dividends to boost my passive income stream.

I believe both of these stocks are top UK shares that would enhance my portfolio. And the recent stock market correction has thrown up many opportunities, so I will continue hunting as well.

So let’s explore two companies that I’m thinking of adding to my portfolio this month with £1,000.

The leader nobody’s heard of

The video game industry enjoyed quite the tailwind during the height of the pandemic. With everyone stuck at home, many turned to this source of entertainment to pass the time. Yet it seems the industry’s growth has continued, even with (almost) everyone heading back to the office.

A growing market opportunity breeds competition. And for most game development studios, that could be a sign of trouble ahead. But not for Keywords Studios (LSE:KWS). And it’s one of the main reasons why it’s on my list of UK shares to buy now.

As a reminder, this is a services company that provides the picks & shovels to leading development studios such as Activision Blizzard and Microsoft. With the revenue stream not exposed to the risk of a title flop, Keywords is in a uniquely strong position. Although there could be notable threats on the horizon. With AI getting smarter, player testing and translation services may soon be a thing of the past, eliminating a good chunk of the group’s revenue stream.

That’s obviously a significant long-term threat. But with income originating from plenty of other services such as 2D & 3D asset creation, programming, and audio FX, I believe the group can adapt. In the meantime, the company is delivering double-digit growth. And yet the share price is down by nearly 20% in the last seven months. That, to me, looks like an excellent buying opportunity for my portfolio.

UK shares to buy now for the digital revolution

Another not-so-well-known business in the British market is Kainos Group (LSE:KNOS). This firm provides a host of support services to companies as well as governments that all aim to digitalise operations. Kainos is the brains behind the digitalisation of patient files in the National Health Service. And they’re also enabling The National Archives to transition its entire operation into the digital world.

Much like Keywords Studios, Kainos’s share price has endured quite the tumble in recent months. In fact, since the start of 2022 alone, it’s fallen by almost 25%. And that’s despite delivering 33% growth in its top-line revenue.

Kainos is not without its risks, of course. With large chunks of the British government relying on its software solutions, any breach in cyber security could have dire legal and financial consequences. Nevertheless, I’m personally willing to take this risk, given the growth opportunity and the reduced price tag. That’s why Kainos is on my personal UK shares-to-buy list.

With that in mind, let’s dive into the realm of tech stocks to discover what these businesses do and explore some of the UK sector leaders today.

What are tech stocks?

As the name suggests, tech stocks — or shares as they’re often referred to in the UK — can be any business providing a technological product or service. The most common form is a software solutions enterprise. However, this is only the tip of the iceberg.

Electronic device manufacturers, cloud infrastructure providers, content streaming groups and digital payment platforms are all prime examples of technology businesses. And that’s despite the fact that each operates in different industries with contrasting target audiences.

The barriers to entry for this sector aren’t exactly high. Anyone with a laptop, an idea and a strong determination can start coding with next to no budget. In fact, that’s precisely how some of the biggest tech stocks today got started.

As a result of this abundance of competition, these businesses are often rigorously investing in research and development (R&D) as well as marketing to the point that most stay unprofitable for many years. That makes them highly dependent on external financing typically raised through equity issues even after their initial public offering (IPO).

Needless to say, tech shares carry a higher risk profile than the average business. But if we travel across the pond and look at the S&P 500, the vast majority of its returns in the last decade have been driven by tech stocks like Apple, Microsoft, Amazon and Meta (Facebook). In other words, the elevated risk comes with an even more considerable reward potential.

[KevelPitch adtype=4578]

Top tech shares in the UK

Here are five leading UK tech shares in order of market capitalisation.

Ocado Group

Ocado Group is best known for being a key player in the online grocery space. The business runs a website that allows consumers to order groceries from the comfort of their own homes. And during the height of the pandemic, demand for such a service skyrocketed.

This e-commerce operation remains a core part of the business today. However, management is paying far more attention to the lesser-known side of the company – its robotics platform.

What has helped make Ocado’s online grocery store a success over the years is its ever-growing investments and research into robotic automation. Today, almost every aspect of its fulfilment centres are run by machines, drastically reducing labour costs and accelerating the process of packaging customer orders for delivery. 

The tech stock is now offering its warehouse automation platform to other retailers under the name Ocado Smart Platform (OSP) for some pretty substantial fees. But by providing significant cost savings, the firm has secured contracts with companies like Morrisons in the UK, Kroger in the US, and a handful of others.

Key Metrics:

• Market Cap: £8.94bn (as of 21 Mar 2022)
• Average Daily Volume: 2.05m
• HQ: Hatfield, UK
• Cash/Debt: £1,470m / £1,828m (as of 28 Nov 2022)

Avast

Avast is a tech stock that operates in the currently surging cybersecurity industry. The group offers a portfolio of anti-virus and security solutions suitable for personal computers as well as enterprise data centres.

It’s probably best known for its free personal anti-virus solution. The freemium technology protects personal computers from most threats. But its capabilities can be further extended through paid upgrades like its Cloud-Backup service, which prevents data loss in the event of a ransomware attack.

Management’s strategy of offering this free solution has filled up a massive pool of 435 million monetisable users, which it can directly target with marketing campaigns and promotions. And it’s an advantage that rival group NortonLifeLock is currently trying to get its hands on through an $8.6bn merger. But the deal is currently receiving antitrust regulatory pushback, which could halt it dead in its tracks.

Key Metrics:

• Market Cap: £5.89bn (as of 21 Mar 2022)
• Average Daily Volume: 4.42m
• HQ: London, UK
• Cash/Debt: £435m / £838m (as of 31 Dec 2022)

Wise

Wise is more commonly known by its former title TransferWise, and is a provider of digital financial solutions serving over 10 million customers worldwide. What started out as a simple money transfer business has evolved into a complete digital banking solution.

Using the tech stock’s platform, users can send and spend money abroad to 80 different countries, as well as receive and store payments in multiple currencies. Developers can integrate its payment technology into their own applications through APIs, and businesses can take advantage of its agile banking services.

Of course, all of these solutions can be achieved through traditional banks. However, the cost of doing so is significantly higher and is far less efficient. For example, a conventional international bank transfer can take three working days. Wise can do it almost instantly for a fraction of the cost, in most cases.

Key Metrics:

• Market Cap: £5.72bn (as of 21 Mar 2022)
• Average Daily Volume: 1.48m
• HQ: London, UK
• Cash/Debt: £5,392m / £98m (as of 31 Dec 2022)

Darktrace

Similar to Avast, Darktrace is a cybersecurity enterprise. However, it’s strictly business-facing and takes a different technological approach to fight cyber threats. Rather than taking the traditional route of hard-coding solutions, the tech stock’s software suite is powered by machine learning.

Whenever encountering a new threat, an AI programme analyses the attack to automatically derive a solution. Once the threat has been dealt with, the platform knows how to prevent such an attack again in the future, making its defensive capabilities grow stronger with each encounter. In other words, the software behaves similarly to a self-teaching immune system for computers.

The firm is still a relatively new entrant into the cybersecurity industry. But it’s already serving over 6,531 clients worldwide, protecting almost all aspects of their digital operations including cloud servers, email, internet of things (IoT) devices, and private networks.

Key Metrics:

• Market Cap: £3.13bn (as of 21 Mar 2022)
• Average Daily Volume: 3.43m
• HQ: Cambridge, UK
• Cash/Debt: £366m / £33m (as of 31 Dec 2022)

Kainos

As tech shares go, Kainos is pretty under the radar. The company is an expert in executing digital transformations within businesses and governmental agencies. This involves moving from traditional systems to modern-day cloud-based and AI-driven automation platforms.

The tech stock also provides a suite of consulting and software solutions to further improve talent management courtesy of its partnership with Workday. Clients can use these services to manage operations, payroll, recruitment, security, and even its financial accounts.

With companies and governments worldwide looking to reduce spending and improve operational efficiency, Kainos has had little trouble attracting customers. And despite its relatively small size, the group has secured contracts with the NHS, the Home Office, and even the Bank of Ireland.

Key Metrics:

• Market Cap: £1.75bn (as of 21 Mar 2022)
• Average Daily Volume: 231,710
• HQ: Belfast, UK
• Cash/Debt: £80m / £3.22m (as of 31 Dec 2022)

Are tech stocks right for you?

The UK tech sector isn’t as closely followed as its counterpart in the US. Yet that doesn’t mean there aren’t excellent opportunities for investors willing to take on additional risk.

Just looking at these five tech stocks, an investor who bought equal positions in each over the last half-decade is now enjoying a 196.8% return! That’s a 24.3% annualised return, smashing the FTSE 100 by a landslide.

But it’s not been a completely smooth ride. For example, investors who bought shares of Wise in its IPO last year are currently enduring a 44% loss.

Risk comes with the territory. And that means tech stocks aren’t suitable for all investors. But for those keen on reaping these potential returns, a diversified approach may be a sensible route. By buying shares consisting of promising UK tech companies, the odds of buying into a winner go up and should help irradicate the lacklustre returns of the losers.

[KevelPitch adtype=151]