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Stableview’s Ron Shuttleworth and Colin Fisher talk tech investing

Shuttleworth
Shuttleworth
Shuttleworth: “Multiples are still below those prior to the recession and nowhere near where they were during the tech bubble.”

How should Canadians approach the public markets in 2014?

After a more than decade run in mining and metals, many are without doubt finding that terms like “core sample” “proven and probable” and “grade per tonne” aren’t associated with winning stocks much anymore.

The sector rotation to innovation has been essentially an orderly one, but the background music on the ride is punctuated by the sounds of a private sector (think Hootsuite, Desire2Learn and BuildDirect) that is demanding attention. The next wave of tech  IPOs in Canada will be the strongest graduating class ever, virtually assuring that the sector will remain front and centre for some time to come.

With most listed techs already trading well off their lows, is there still room to participate in Canada’s tech boom? Ron Shuttleworth, a former analyst with M Partners who has joined Stableview Asset Management, a Toronto-based firm that  recently launching a hedge fund that will focus on technology and innovation,  will be in Vancouver on April 2nd to address this very question. The short answer, according to Shuttleworth? “Yes, if you know where to look.” We talked to him and to Stableview Portfolio Manager and President Colin Fisher about how they are approaching investing this year.

Ron, you are going to be in Vancouver on April 2nd, can you tell us about your appearance?

Sure Nick, thanks. We are running a seminar with Market Motion Media to provide for local brokers and retail investors a little insight into technology investing in Canada. The market has been very resource oriented for the past decade so we had a lot of requests from people in the capital markets to share some of the methods and approaches we take to analyze and pick technology stocks. Essentially we are trying to take some of the perceived mystery out of our sector. We are also showcasing some of our favorite up and comers.

Ron, your had a great year with your top picks in 2013. How did you accomplish that?

First of all, we think that companies that are capable to deliver strong cash flow with minimal effort should be the most interesting to investors. And there are quite a few of those companies that exist on the TSX TSXV and NASDAQ. The big returns come when you discover that some of those stocks have been overlooked or misunderstood by the market. This is what we tried to do last year, and it turned out to be an effective strategy.

There are still many stocks that are not recognized for their quality earnings because there are gaps in understanding by the market. We like those types of stocks.

Tech has been hot for a while now. Are there really any bargains to be had?

In general, the sector rotation that has been occurring over the past 18 months or so has resulted in a significant inflow of capital into the sector. As capital has increased dramatically, so has liquidity which has dramatically elevated the sector multiples. However, the multiples are still below those prior to the recession and nowhere near where they were during the tech bubble. So the sector is actually reasonably priced – especially when considering the efficiency of earnings of modern tech companies compared to those of past eras. We think that some of the “star” stocks on the TSX could be fully valued and there are other trader favorites that are overvalued. However, there are still many stocks that are not recognized for their quality earnings because there are gaps in understanding by the market. We like those types of stocks. The general theme for bargain hunting is “transition” and we like to find companies that are successfully transitioning their business models, management team, or product lines.

Colin, what is your take?

In any market at any time there are going to be bargains to be had. There are always companies which are misunderstood, going through transition or simply hated by the street or even better, are not yet known by the street. Given that there are always good companies to invest in – with good margins of safety, or with a very good risk to reward ratio. Sometimes it is about turning over more rocks than the other guys and kissing more frogs and looking where other people aren’t.

We think that the “internet of things” could be be bigger and more profound than the Internet and Mobile markets combined. And it is just getting started.

Ron, why are Software as a Service stocks doing so well?

The stocks of SaaS companies are doing well because they are typically perceived by investors to have efficient earnings and strong cash flow. A SaaS company tends to scale slowly compared to perpetual license, or hardware company – but each dollar earned becomes more efficient because a SaaS company sells once and gets paid 24 to 48 times. So over time, earnings margins tend to expand. Also, it is perceived by the market that SaaS revenues and earnings are less impacted by economic cycles – so investors are willing to pay forward “insurance” premiums for predictable revenue and earnings.

So any SaaS company should be considered a great investment?

Haha! Not really. We’ve found that not all SaaS companies are created equal. Just because you are a SaaS company does not mean that you are a good company. In fact, some companies mask weak products or poor market positioning with the SaaS model. It took us a while, but we are becoming more comfortable avoiding stocks of these companies. Here is something else. What happens when every enterprise technology provider becomes a SaaS vendor? We are already beginning to see customers successfully weaken the exit terms of recurring contracts. What does this mean? It means customer empowerment and more churn risk and we think that this breaks some of the SaaS assumptions that are building in the market. We are looking at companies that invest in customer satisfaction and support. To us, the second S in SaaS will become the great differentiator heading into the next down cycle. As a result, we are spending more time trying to analyse and quantify the second S.

What do you think are the areas of tech that will be hot in 2014?

Ron: We still think that anything to do with business, SMB, SME, Enterprise is going to continue to be “hot” relative to consumer products. We think that the “internet of things” could be be bigger and more profound than the Internet and Mobile markets combined. And it is just getting started. This B2B trend favors Canadian technology because almost all listed Canadian tech stocks are B2B. Mobile, and in particular enterprise mobile, is still strong. We also are interested in any companies that play in the data stack.

Fisher: When you look at investing in tech, or any sector, you are first investing in management and the board of directors. If they aren’t aligned with investors then the chance of shareholders making money is slim to nil.


Is it possible to apply value techniques like Warren Buffett to picking tech stocks?

Ron: This is why we try to focus on innovation sectors. It is what I know best, and I find it very comfortable attempting to understand these businesses and where the value resides.

Stableview Asset Management Portfolio Manager and President Colin Fisher
Stableview Asset Management Portfolio Manager and President Colin Fisher

Colin, same question…

Warren Buffett is the most often quoted, and misquoted person in the investing universe. I like to use a very rarely used quote from him: “hire someone who is smart, aggressive and ethical. And if the person doesn’t have the last criteria, the first two will kill you.” So when you look at investing in Tech, or any sector, you are first investing in management and the board of directors. If they aren’t aligned with investors then the chance of shareholders making money is slim to nil, you might get lucky once in a while, but the process of investing is to ensure that the elements of the investment are aligned in your favour. As to applying true Value Investing techniques to tech companies – of course you can, it happens all the time. Not all tech companies have insane valuations and no prospects of ever seeing income. That is a misnomer that has carried over from the Dot Bomb era of the early 2000s. I constantly see good companies with great valuations and good growth prospects. In fact, right now I am seeing more good companies with great prospects at decent prices than I ever have in the last 10 years. That said, we invest in both public and private companies. The private companies in Canada right now are amazing. They blow my socks off. I am continually seeing great companies that are solving real problems and are using technology do it and at fair valuations.

The event “Investor Education Series: Picking Technology Stocks 101” will take place from 2pm-4pm on April 2nd at the Vancouver Convention Centre Room 201 West. Cantech Letter readers can attend for free by emailing Jule Durant julie@marketmotionmedia.com with the subject line “Cantech Letter – Free Seat April 2.

About The Author /

Cantech Letter founder and editor Nick Waddell has lived in five Canadian provinces and is proud of his country's often overlooked contributions to the world of science and technology. Waddell takes a regular shift on the Canadian media circuit, making appearances on CTV, CBC and BNN, and contributing to publications such as Canadian Business and Business Insider.
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