For Great Returns, Invest with Companies Expanding Into High-Margin Services

One of the great success stories of the past decade has been the rise of many big-cap tech names. Companies like Microsoft (MSFT) and Amazon (AMZN) have soared to new highs on the back of the expansion into markets such as web services.

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  • These services tend to have a high profit margin once set up and running. And they create a recurring revenue stream compared to one-off sales. That kind of business model is seeing an expansion thanks to its success.

    One tech play that appears to be moving in that direction is Xerox (XRX).

    Best known for printers and copy services, the company is changing its operating model to focus on information technology and digital services.

    That could allow the brand to adapt to the 21st century and thrive.

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  • Currently, Xerox has a low 2.5 percent profit margin. The profit margin on digital services could be significantly higher, allowing the company to increase its cash flow without a significant increase in expenses.

    With shares trading at just 7 times forward earnings, more growth could be ahead as the earnings increase and the multiple expands.

    Action to take: Investors may like shares here, even near 52-week highs. At current prices, Xerox also pays a dividend of nearly 6 percent.

    For traders, the June $20 calls, last going for about $1.65, could see high double-digit returns or better in the months ahead, as the uptrend in shares is likely to continue.


    Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any company mentioned in this article.

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