Cantech Awards: The Numbers

The voting for 2010 Canadian Tech Stock of the Year contained some obvious choices. SXC Health, for instance, added a billion dollars in market value and posted a 40% top line gain. Westport Innovation’s stock continued a dramatic run that began in 2009. In 2010 it was also revealed that legendary investor George Soros became its largest shareholder. The selection of a winner was muddied by late runs from Mosaid, Wi-Lan, and International Datacasting, which benefited from the infusion of energy brought to the table by board and management changes, spearheaded by Fred Godard and Adam Adamou, who many readers will know as a regular contributor to Cantech Letter.

But in the end, our panel of judges, and the readers of Cantech Letter, chose clear winners for Canadian Tech Stock of the Year; Glentel, and for Executive of the Year, Mark Thierer of SXC Health.

We break down the winners and the judge’s choices:

Cantech Letter 2010 Canadian Tech Stock of the Year

Winner: Glentel

Runner Up: SXC Health
Third Place: Westport Innovations

Cantech Letter 2010 Canadian Technology Stock Executive of the Year

Winner: Mark Thierer of SXC Health

Runner Up: Tom Skidmore, Glentel
Third Place: David Demers, Westport Inovations

How the judges voted:

Cantech Letter Readers:

Canadian Tech Stock of the Year: Bioniche Life Sciences
Canadian Tech Exec of the Year: Mark Thierer, SXC Health

Nick Waddell:

Tech Stock of the Year: Westport Innovations
Tech Exec of the Year: Mark Thierer, SXC Health

Kirk Exner:

Tech Stock of the Year: Electrovaya
Tech Exec of the Year: Mark Thierer, SXC Health

Electrovaya – Canadian Tech Stock of the Year – editorial by Kirk Exner

Although “money isn’t everything” it is certainly something when you are evaluating the performance of your investment portfolio and the various stocks that you own. So when determining the tech stock of the year one must consider the ROI during 2010. But as an investor, how important is money if indeed “money isn’t everything”? The short answer is very but there are a few other important factors to consider when evaluating which public company is worthy of the moniker of Canadian Tech Stock of the Year.

Of equal importance is liquidity. Liquidity is a measurable that speaks directly to the relative “demand” for the company’s shares in the public arena. It also speaks to the effectiveness (or ineffectiveness) of a public company’s corporate plan. Liquidity also supports a public company’s ability to raise money via the public equity markets – if and as required. There are two key ways to evaluate liquidity. First, the dollar volume of stock traded over a period of time; and second, the number of trades. A stock may trade a large dollar volume of stock in any given day but if there are very few trades then this is not an adequate measure of liquidity.

In addition to ROI and liquidity, another important factor when evaluating the relative success of any technology company over any given period of time is materiality. What material changes occurred within the year that are significant, not only in 2010, but to the company’s long term success in the years to follow.

For the reasons outlined above my selection for Canadian Tech Stock of the Year is Electrovaya. Shares of Electrovaya have posted a massive 1 year gain of 170% and the company’s market cap has increased accordingly from $60 million to $163 million. The company has been very liquid with dollar volume traded as at October 31st, 2010 as reported by the TSX of $206 million with 64,576 trades over the same period. Finally, the company has benefited from what can only be described as major material changes during 2010.

Electrovaya was chosen by Chrysler Group as the battery supplier for 140 Ram plug-in hybrid electric vehicles in a demonstration program. But beyond this news release the company has been relatively silent with respect to additional industry/business developments – or has it? What is perhaps more important for Electrovaya at this juncture is people. Two days prior to the Chrysler announcement the company announced that former Chrysler chief executive officer, Thomas LaSorda, was appointed to its board of directors and was also appointed as special adviser to Electrovaya chief executive officer, Sankar Das Gupta. From all accounts, Thomas LaSorda is a world-class business professional that brings a tremendous amount of experience to the table. In addition to Mr. LaSorda, Electrovaya has also recruited Bruce Coventry as vice-president of operations who happens to have an extensive career with, you guessed it, Chrysler. Later this year Electrovaya also announced that former Nortel chief operating officer Clarence Chandran joined Electrovaya’s board of directors. Again, Mr. Chandran is a world-class business professional and is another major asset to Electrovaya. 2010 was an outstanding year for Electrovaya, the company has made the move from concept to commercialization and has done an outstanding job building its management team – a foundation for future success.

Saj Karsan:

Tech Stock of the Year: Glentel
Tech Exec of the Year: Tom Skidmore, Glentel

Glentel – Value in Action – editorial by Saj Karsan

Glentel (GLN) has seen its stock rise by approximately 100% in the last 12 months. Usually, stocks that see such sharp price increases have a speculative element to them that precludes long-term investors from participating. But this is not the case for Glentel, a company that traded at a low P/E twelve months ago, and yet generated strong returns on equity; instead, Glentel’s stock performance illustrates how value investors can profit from such companies in two ways: earnings growth, and multiple expansion. When these two forces combine, as they did with Glentel over the past year, returns for investors can be phenomenal.

Glentel generates most of its revenue from selling mobile phones and related items through retail stores in shopping malls and other locations. Twelve months ago, the company traded for $150 million despite $30 million of cash, negligible debt, and trailing 12-month earnings of $12 million. Therefore, adjusted for its cash balance, the company traded at a P/E of 10.

Companies trading at P/E’s of 10 or below tend to be in decline or in a lot of debt, but Glentel was neither of these. The company was generating returns on equity of around 20%, so its business model was working. As such, the company expanded and thus grew its profits throughout 2010.

As profits grew, so did the company’s P/E multiple, providing the double-whammy effect on the stock referred to in the opening paragraph. Glentel now trades at a P/E of 16, which is much more reasonable considering the company’s ability to generate earnings and cash flow.

Undoubtedly, Glentel’s business has been helped by strong consumer demand for smartphones. But it should be noted that the company nevertheless faces competition in this space from both very strong retailers and upstarts who face low barriers to entry. The fact that the company is able to generate strong returns despite such competition is a tribute to management’s capabilities.

Looking forward, Glentel may have room to grow profits, both organically and through acquisition (the company recently purchased a US chain of mobile phone retailers). But gains to the stock are unlikely to be nearly as strong. The company’s P/E is no longer low, and the company is now more risky as it has taken on debt to expand (in contrast to the net cash position it enjoyed a year ago). As a result, investors would be well-advised to seek out companies that currently exhibit the low P/E and high ROE properties that Glentel experienced one year ago.

Adam Adamou:

Tech Stock of the Year: Glentel
Tech Exec of the Year: Mark Leonard, Constellation Software

Ron Shuttleworth:

Tech Stock of the Year: SXC Health
Tech Exec of the Year: Art Mesher, Descartes Systems

Tech Achievers in 2010 – editorial by Ron Shuttleworth

Among the list provided, from an investor’s perspective I think that the clear winner is probably SXC. It continues to make excellent strategic acquisitions, has a solid balance sheet with $386M in cash, or $6.34 per share, and a 3yr CAGR of 75% per annum. FY2011 consensus EBITDA of $161M infers a 40% growth in operating earnings over $116M in 2010. EBITDA margins are modest at 6.1%, but this is a high growth company will very solid fundamentals and an under appreciated Canadian success story.

With respect to CEOs, I would like to write-in Art Mesher, CEO of Descartes Systems. DSG has been trading at not only 52-week highs, but also 7-year highs since the end of November. Art has delivered consistent EBITDA margins in excess of 25% for the past nine quarters and is in the process of evolving DSG technology to become an end-to-end platform for the entire supply chain and EBITDA profitability for 24 straight quarters. He has managed to create a culture of excellence of customer service which has helped him develop a customer base of over 6000 clients and 55,000 trading partners. Most of its acquisitions over the past 5 years have been ideas generated by its customers, which is a testament to loyalty. Even its biggest acquisition (Porthus for $43.7M) was integrated ahead of expectations.

The company has done an excellent job acquiring capabilities ahead of opportunities. Its recent acquisition focus on Europe has been in anticipation of major regulatory opportunities. The company will continue to make strategic acquisitions – probably in South East Asia, and probably add capabilities to its platform. For being exceptionally strategic, for nearly perfect execution over a long period of time, for providing only upside surprise to investors, and for making its customer base love DSG, I vote for Art.

Jim Letourneau:

Tech Stock of the Year: Westport Innovations
Tech Exec of the Year: Mark Thierer, SXC Health

Westport – Canada’s Tech Stock of the Year – editorial by Jim Letourneau

There is a great list of nominees for the 2010 Cantech Awards and picking a winner is challenging. However, I like to use under the radar macro trends to guide my investing so I’m going with Westport Innovations. Rather than hope for higher natural gas prices while producers build out an additional 100-200 years of supply, I prefer to look at the enormous upside in technologies that consume natural gas. Westport Innovations, is a leading designer of natural gas engines and has partnerships with leading global manufacturers like Cummins, Volvo and Weichai.

The black swan event that is still catching investors off guard is the successful application of horizontal drilling and multi-stage fraccing of shales in the natural gas industry. Initially viewed as an oddity and restricted in scope and practice to the Barnett shale in Texas, this technology has spread rapidly to basins throughout the world. North America now has a 100+ year supply of natural gas. Natural gas prices are higher than they were 10 years ago but since January, 2009 they no longer move in tandem with the oil. The rush to build liquefied natural gas (LNG) terminals for the import of natural gas to North America has suddenly shifted to one where the terminals are being designed for natural gas export.

One very big investor, Soros Fund Management, now owns five per cent of Westport.

The global abundance of natural gas shifts the investment scales to favor technologies that consume natural gas. It remains the leading alternative to fuels with higher carbon/hydrogen rations like gasoline and diesel with the additional advantages of lower costs and increasingly domestic availability.

Westport would benefit tremendously from any US legislation mandating increased use of natural gas powered vehicles (NGVs) but increasing oil prices and stable natural gas prices will also draw more attention to the investment upside in natural gas fueled trucks.

At the time of publication Cantech Editor Kirk Exner owned shares of Electrovaya.