What comes to mind when you think of niche stock?
For some, it is one that flies under the radar of most investors. It could be a stock with little or no analyst coverage. It could be a company with technology that meets the needs of a smaller total addressable market (TAM).
In fact, Cambridge Dictionary defines niche as “a job or position that is very suitable for someone, especially one that they like.”
The following three niche tech stocks to buy are from the portfolio holdings of tech ETFs that specialize in niche products or services. For example, cloud-computing ETFs would not typically be considered as a niche businesses. AgTech ETFs could be.
So, let’s examine three tech stocks to buy that investors won’t likely find in some of the larger tech ETFs.
Sotera Health Company (SHC)
Sotera Health Company (NASDAQ:SHC) is the sixth-smallest holding of the iShares Emergent Food and AgTech Multisector ETF (NASDAQ:IVEG). The ETF invests in U.S. and non-U.S. companies that will benefit from creating or using agricultural technologies.
Sotera’s three businesses of Sterigenics, Nordion, and Nelson Labs provide sterilization services, lab testing, and advisory services to healthcare companies. It has more than 5,800 customers in 50+ countries worldwide.
The downside? Most of the company’s proprietary technology is not patented. However, its sterilization work is very sensitive. For example, Nordion produces and sells Cobalt-60 (Co-60), a radioactive isotope used in radiation sterilization. It decays naturally at a rate of approximately 12% annually.
Also, the product undergoes quality assurance testing and is shipped in proprietary lead and steel containers. This is a big deal. Specifically, we’re talking about radioactive materials that must be treated with utmost care.
And, in Q3 of 2023, its revenues increased by 6% year over year (YOY) to $263 million. Additionally, its EBITDA rose by 7% to $134 million, making the 51% adjusted EBITDA margin is attractive.
SiTime Corp. (SITM)
SiTime Corp. (NASDAQ:SITM) is one of the smallest holdings in the iShares Future Cloud 5G and Tech ETF (NYSEARCA:IDAT). The latter is a fund dedicated to stocks that could benefit from providing products and services for cloud computing and 5G.
Also, SiTime’s market capitalization of $2.3 billion is just 11% of the ETF’s average market cap of $21.6 billion.
Impressively, SiTime participates in the $8 billion global timing market. The company’s all-silicon timing systems solutions are used for a variety of electronics devices. Those include communications, automotive, industrial, aerospace, mobile, Internet of Things (IoT), and other industries requiring high-performance timing solutions.
Examples of their use include airbag sensors, inkjet printer heads, optical switches, blood pressure sensors, and many other mass-produced products. The company sells its precision timing products to distributors, with its top three distributors accounting for 70% of its revenue in 2022. Those, in turn, sell them to the end user – the largest being Apple (NASDAQ:AAPL).
Word to the wise. SiTime is not profitable on a GAAP basis at the moment. However, it did generate a small non-GAAP profit of $1.4 million in Q3 2023 on revenue of $35.5 million. Yet, considering the global cloud computing market estimated to be over $500 billion, the $8 billion market in which SiTime participates is truly niche.
Constellation Software (CNSWF)
Constellation Software (OTCMKTS:CNSWF) is the 14th-largest holding of the Franklin Intelligent Machines ETF (BATS:IQM). It is an actively managed fund investing in disruptive business models focused on machine learning and automation.
Like SiTime, Constellation Software is a niche business model. It’s a serial acquirer that the Economist recently called the tech version of Berkshire Hathaway (NYSE:BRK-B).
The company was created by Toronto venture capitalist Mark Leonard in 1995. His intention was to build verticals of software businesses in various industries through mergers, acquisitions, and organic growth.
Specifically, Constellation had $270 million in total assets in March 2008. And as of Sept. 30, CNSWF stood just over $10.0 billion. The company’s revenue through the first nine months were $6.1 billion, 27% higher than a year ago, with 6% organic growth, with the rest from acquisitions. Its free cash flow over the first nine months was $835 million, 48% higher than a year ago, suggesting it will generate close to $2 billion in 2023.
Since Constellation went public in May 2006, its shares have appreciated nearly 12,000%. Up 55% in 2023 and 257% over the past five years, it continues to deliver on its M&A.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
