Get defensive with these Canadian tech stocks, says Cormark

Many of Canada’s best technology names are mature companies with recurring revenue streams that make them particularly attractive in the current market downturn, says Cormark analyst Richard Tse.

In a research report to clients this morning, Tse talked about a phenomenon that has seen certain companies that performed well in the bull market showing resilience in the recent downturn. The analyst spots a commonality; these are techs that have matured to a point where their revenue is “sticky” because of long-term contracts, cloud, or maintenance revenue.

Tse highlighted four Canadian tech stocks he sees as particularly attractive right now; OpenText (OpenText Stock Quote, Chart, News: TSX:OTC), CGI Group (CGI Group Stock Quote, Chart, News: TSX:GIB.A), BSM Technologies (BSM Technologies Stock Quote, Chart, News: TSXV:GPS), and Constellation Software (Constellation Software Stock Quote, Chart, News: TSX:CSU).

Open Text, says Tse “is one of the best bets in this current downturn”. He expects that the Waterloo-based company will grow its topline by 18% in fiscal 2015, and has a wide range of potential acquisition targets. The analyst has a “Buy” rating and (US) $67.00 target on the stock, which at press time was trading at $52.80.

Tse says CGI Group is currently trading at a 10% discount to its peers. He thinks the company’s recurring revenue rate may be misunderstood. “While only 52% of CGI’s revenue is outsourcing under long-term contracts, we believe a third to half of the company’s systems integration business is tied to those outsourcing contracts, taking CGI’s recurring revenue base closer to 70%,” he says. Tse currently has “Buy” rating and $45.00 one-year target on CGI, which was trading at $33.83 at press time.

BSM Technologies, says Tse, is one of the “most compelling” smallcap names on his radar. His current “Top Pick”, the analyst notes the company has 65% recurring revenue and $0.26 per share in net cash. He expects the company will grow its topline by more than 23% in fiscal 2015. Tse currently has a $3.50 one-year target on BSM, which at press time was trading at $1.47.

Lastly, Tse warns that Constellation Software, which he considers to be “one of the most defensive” names in his coverage universe, isn’t cheap. But with 63% recurring revenue and a spate of opportunities in Europe, he thinks the stock can continue to add to its remarkable recent performance. The analyst has a “Buy” rating and a $325.00 one-year target on the stock, which at press time was trading at $272.90.