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Top Canadian Tech Stock Picks for 2019 from GMP Securities

Canadian investment bankers GMP Securities are expecting equity markets to reach new highs in 2019, with tech sector stocks leading the way. On Wednesday, GMP presented its Best Ideas list for the year, featuring stocks that it sees as offering at least a 20 per cent return and favouring growth over value within all sectors.

GMP analysts give a number of reasons to be bullish about the markets in general in 2019, including: historically, the third year of the US presidential cycle has let to positive market returns in 91 per cent of cases since 1926 and that periods of bearish investor sentiment like the one just witnessed are commonly followed by sustainable market rallies. Further, the S&P 500’s correction of nearly 20 per cent over the second half of 2018 has created an attractive entry point, while valuations especially on Canadian small and mid-caps stand out as particularly cheap.

In all, GMP argues that having now had a record number of years of growth is not an indication that we’re due for a recession. Instead, they see a slower motion cycle returning to a more sustainable two per cent pace of growth, saying, “Investors should stop thinking of this cycle in terms of its age in years and instead consider where we are in the cycle. We still think these are the middle innings and the cycle could last until the mid-2020s.”

In technology, the marked valuation pullback over the past few months has led to a buyer’s market, not just for investors but for companies known to be strong acquirers. On that front, GMP picks Descartes Systems Group (Descartes Systems Group Stock Quote, Chart TSX:DSG), Enghouse Systems (Enghouse Systems Stock Quote, Chart TSS:ENGH) and CGI Group (CGI Group Stock Quote, Chart TSX:GIB.A).

On Descartes Systems, analyst Deepak Kaushal says that although the company has seen a steady rise in share price in recent years, he’s nonetheless comfortable with its growth prospects as the company and its services are becoming more strategic to its customers and partners in an increasingly complex environment. The analyst is rating DSG a “Buy” with a $50.00 target, representing a 42 per cent return. (All price targets are as of publication date.)

Kaushal also sees Enghouse as faring well in an M&A supportive environment, with the company ending its fiscal 2018 with solid profit and cash flow in its fourth quarter.

The analyst says, “We view ENGH as a reliable cash-generating company in the software sector and believe ENGH has a successful business model of growth by acquisition which can be repeated. ENGH has a long history of success including no annual losses in more than 10 years, rising EBITDA, rising cash generation and modest dividend.”

Kaushal rates ENGH a “Buy” with a target price of $89.00, representing a return of 34.7 per cent.

Another serial acquirer with more than 70 acquisitions over its history, CGI Group’s management is also forecasting customers and enterprises to increase IT services spending in 2019, leading to accelerated organic growth. Kaushal highlights CGI’s better US and European bookings, with the company reporting its backlog up 8.5 per cent year-over-year for its latest quarter. That plus strong cash flow and a proven record of smart capital allocation means that GIB.A deserves a premium valuation. The analyst provides a “Buy” rating and 12-month target of $99.00 based on a 12x F2020 EBITDA estimate, which translates to a return of 22 per cent.

Media and entertainment company Stingray Digital (Stingray Digital Stock Quote, Chart TSX:RAY.A) also gets the nod from GMP, with Kaushal pointing out that Stingray’s share price is now back to near-IPO levels and is currently trading at 8.1x C2019 EV/EBITDA, which represents a 20 per cent discount versus its 2015 valuation.

“Since its 2015 IPO, Stingray more than doubled its $70 million audio music business into a $150 million business diversified across video, mobile and international markets,” says Kaushal. “With the addition of NCC, Stingray now has three strong revenue pillars generating $320 million to drive accretive cash flow growth.”

The analyst rates Stingray a “Buy” with a target of $14.50, representing a projected return of 112 per cent.

Finally, factory automation systems company ATS Automation Tooling Systems (ATS Automation Stock Quote, Chart TSX:ATA) saw its share price fall by 39 per cent since early October, but GMP analyst Justin Keywood says his thesis on the company remains intact, namely, that ATS will capitalize on a booming automation industry. The company’s bookings are up 36 per cent over the past nine months, with Keywood predicting margin expansion and further M&A activity.

“We see the recent share weakness as providing a good buying opportunity for what’s ahead,” says Keywood, who rates ATA a “Buy” with a $27.00 target price, representing a projected return of 87 per cent.

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About The Author /

Jayson is a writer, researcher and educator with a PhD in political philosophy from the University of Ottawa. His interests range from bioethics and innovations in the health sciences to governance, social justice and the history of ideas.
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