Canadian tech stocks could cool off in the second half of 2018: National Bank

It’s been a great year for the Canadian tech sector. But investors should dampen their expectations of the space in the second half of the year, National Bank Financial analyst Richard Tse says.

In a research report to clients today, Tse noted that many of the names in his coverage universe, such as Shopify (TSX:SHOP), CGI Group (TSX:GIB.A), Kinaxis (TSX:KXS) and Solium Capital (TSX:SUM) have outperformed, and that the TSX Info Tech Index is up 33 per cent year-to-date versus just two per cent for the TSX as a whole. The analyst explained why he thinks this is so.

As you also might expect, the strength in the U.S. Technology sector has played a part in the Canadian Technology sector as our group is unquestionably correlated,” Tse says. “On that note, the U.S. Technology sector has had strong performance with much of it concentrated in the FAANG stocks. We believe the leadership in our coverage universe has largely come from investors looking at the Canadian equivalent of U.S. FAANG stocks with some exceptions in large legacy names like Constellation Software and CGI where familiar business models and (high) earnings quality have made these de facto names to offering exposure to technology in Canada with the larger names leading the charge in performance this year with the top 25 Canadian tech names by market capitalization outperforming the next 25 names by a factor of 6x when it comes to year-to-date returns.”

The National Bank Financial analyst says investors who have been flying high should prepare to come back to earth, at least in the short term.

“The question for you, the investor, is – how much upside is left in our coverage universe as we enter the back half of 2018? In our view, it’s less than the returns so far this year as the risk-to-reward profile for many of our coverage names have become more balanced given the meaningful returns year to date which is why we’ve been suggesting investors consider looking at more defensive / legacy names / lower relative valuation names – like Maxar and Open Text. That’s not to say we don’t like the growth names like Kinaxis and Shopify, or even legacy leaders like CGI, we just think investors considering those names will require a longer-term outlook to capture the full value potential.

Tse has a $100.00 targets on CGI Group and Kinaxis, implying returns of 16 per cent and eight per cent, respectively. He has a (US) $180.00 target on Shopify, for just a five per cent retrun. And his $13.50 target on Solium Capital is seven per cent better than its current price.