TSC Ratings provides exclusive stock, ETF and mutual fund ratings and commentary based on award-winning, proprietary tools. Its "safety first" approach to investing aims to reduce risk while seeking solid outperformance on a total return basis.Companies that automate and integrate information are the cleanup crews of the new millennium. It's often hard and dirty work. And lucrative. Investors have taken more risks in recent weeks, pushing up the Nasdaq Composite Index more than the S&P 500 Index. Some tech firms have fared better than those in other industries this year because many carry little to no debt and clients are hungry for updated software and other equipment to keep up with rivals. The following are two potential beneficiaries of a tech-spending rebound. They are among 76 of 1,001 information-technology stocks covered by TheStreet.com Ratings that have earned "buy" recommendations. Tyler Technologies ( TYL), based in Dallas, provides integrated information-management services to local governments in all 50 U.S. states, Canada, Puerto Rico and the U.K. State, local and municipal governments have more decentralized (read: inefficient) information-technology services than the private sector, with total expenditures last year estimated at $55 billion. Local-government agencies are struggling to keep pace with the private sector's automation and Internet initiatives. Tyler Technologies' 7,000 customers have bought services from the company for an average of 20 years, creating recurring revenue that provides stability. Tyler Technologies' first-quarter revenue rose 17% to $70 million, exceeding the industry's average of 11%. More importantly, earnings per share and operating margin doubled to 16 cents and 14%, respectively. Unfortunately, the company has a lackluster cash position. Since last year's first quarter, Tyler's cash balance has fallen 82% as the company aggressively invested to expand its business. Tyler also absorbed $7.5 million in debt to fuel growth.
Tyler Technologies has a market value of about $600 million, placing it in the small-cap category. The company's stock has jumped 40% this year, ranking No. 3 of 14 companies on the S&P 600 Application Software Index, which has increased 8.7%. Top stockholders include Barclays Global Investors, a unit of Barclays PLC ( BCS); Bank of America ( BAC); and Vanguard Group. Looking at peer valuation, Tyler Technologies' shares are trading at a premium based on earnings and book value, but are trading at a discount based on cash flow and sales. Pegasystems ( PEGA), based in Cambridge, Mass., develops and supports software to automate business processes in the U.S., the U.K. and Europe. The company's first-quarter revenue jumped 29% to $62 million, and earnings per share nearly tripled year-over-year. Returns are another area of vast improvement. Pegasystems' return on assets increased to 6.54% from 3.46%, while return on equity climbed to 9.42% from 4.88%. Pegasystems' shares make for a market capitalization of about $900 million. The small-cap stock has surged 98% this year, compared with 14% for the Bloomberg Boston Globe Massachusetts High-Technology Index. The share-price increase prompted CEO Alan Trefler to say in March that the company won't sell out to a larger rival. Pegasystems' 300 clients include JPMorgan Chase ( JPM), Expedia ( EXPE) and Ford ( F). Comparing peer valuation, shares of Pegasystems are expensive based on earnings, sales, book value and cash flow, but the company's operational strengths outweigh the rich stock price.