Descartes Systems Group is a buy, says Hap Sneddon

Descartes Systems Group (Descartes Systems Stock Quote, Chart TSX:DSG) had a rough start to the week yesterday, dropping almost five per cent in trading on Monday, but the stock’s long-term trend line still looks good, according to Hap Sneddon, chief portfolio manager at CastleMoore Investment, who says that while US tech stocks are likely to be in trouble for at least another month, Canada’s tech sector is in better shape.

October was a month to forget for technology stocks but so far November hasn’t proven much better, with names ranging from the FAANG favourites on down to small-cap tech feeling the volatility and suffering further selloffs.

The downturn for Canadian SaaS company Descartes Systems started in late September, a few weeks after the stock hit a new high of $46.61. Between September 21 and October 10, DSG dropped 16 per cent before trading up and down for the rest of the month. As of early Tuesday trading, it’s priced at $38.36.

Sneddon says that with the pullback, investors should be taking a serious look at Descartes.

“What we’re seeing right now in the market is a really good setup,” says Sneddon, President and Founder at CastleMoore, to BNN Bloomberg. “[Descartes] is not as broken as you might think. The trend line is actually pretty good there.”

“This is a name that has come up in our model that we actually have to buy. Descartes is at a really good spot to pick up here. It could potentially drift lower into the mid-30s or the higher mid-30s,” he says. “We would have to see this thing move down below that lower band of $32, $33 then maybe there’s something more brewing. Otherwise, this is a good spot to step in.”

Descartes, which will present its third quarter financials for fiscal 2019 on November 28, reported its fiscal second quarter on September 5, generating revenues of $67.1 million, a 17 per cent year-over-year increase, and an adjusted EBITDA of $22.8 million, a 15 per cent year-over-year increase. Over the years, the logistics management company has acquired and absorbed dozens of businesses, with Aljex Software, PinPoint and Velocity Mail being some of the prominent names acquired in 2018.

Sneddon says that beyond Descartes Systems, Canadian tech has a number of options which may fare better over the next while than their American counterparts.

“There are a lot of great companies doing things but the names aren’t as well known, whether you look at OpenText, Descartes Systems, Sierra Wireless, Kinaxis, Constellation Software and Shopify — these are all really good names, but they’re not for the faint of heart as far as their daily moves,” he says. “The US market, I think it’s a little bit more fraught right now. We could be in for a bumpy time for another month or so in the US tech.”