National Bank Financial reveals its best tech ideas for the second half of 2019

National Bank Financial analysts Richard Tse and Andrew McGee are taking stock of the year that has been so far and looking forward to the second half of 2019 with their best tech ideas.

In a research update to clients today, Tse rounded up his and McGee’s top ideas while noting that the first half of the year has been exceptional for them.

“Once again, we find ourselves in an awkward, but fortunate position where many of our favored “picks” have turned in strong performances,” the analyst notes. “While that outsized performance has been due to underlying fundamentals, many of those names have also been buoyed by the strong performance from the market as a whole, and particularly technology, that’s seen the broad S&P Technology Index rise by 30.7% for the year relative to the S&P 500 which has been up 19.5%. With respect to our benchmark, we’ve seen the TSX Technology Index rise 48.9% against the 15.2% return for the broader TSX Composite. The awkwardness comes from the underlying valuation, which is arguably robust with the S&P Technology Index trading at 22.7x, well above the historical 10-year average of 15.9x. With that backdrop, we’re still sticking to our strategy that has us selecting what we believe to be the names with the strongest underlying fundamentals that are not fully priced relative to the market with names like Shopify, Kinaxis and Lightspeed paired with legacy names like OpenText and CGI. Collectively, had you held an equal dollar weight in those names this year – you’d be up 72.9%. In light of that, we’re still holding to a barbell strategy of holding a diversified basket of highflyers and defensive / legacy names.”

Tse has divided the firm’s best tech ideas into three sections for which it has three picks each; “High Flyers”, “Special Sits Tech” and “Larger Cap Legacy”.

Under “High Flyers”, the analyst lists Kinaxis (Kinaxis News, Stock Quote, Chart TSX:KXS), Lightspeed (Lightspeed News, Stock Quote, Chart TSX:LSPD) and Shopify (Shopify News, Stock Quote, Chart NYSE:SHOP).

Tse has an “Outperform” rating and one-year price target of $100.00 on Kinaxis.

“We’re expecting in-line to slightly above expectation results from Kinaxis this Q2,” he said. “That said, we believe an accelerated conversion of the Company’s expanded pipeline won’t occur until Q4 given our view on the average sales cycles relative to when that pipeline began expanding. In addition, we believe a number of operational / management changes / additions over the last year have yet to fully hit their stride, but we believe there’s building momentum in the pipeline.”

For Lightspeed, the analyst has an “Outperform” rating and a new price target of $40.00, up from his previous $30.00 target.

“We’re expecting an in-line FQ1 (Jun) quarter from Lightspeed,” he said. “Perhaps more importantly, we see continued progress in one of the Company’s primary drivers of growth – Payments. For investors familiar with this name, you’ll be familiar with our view that Payments should drive an accelerated growth rate over the next two years (to >40%). In addition, based on our analysis, we believe the Company has also meaningfully ramped up its marketing efforts since becoming public – we believe that has also driven an uptick in web traffic to Lightspeed. Overall, we see no change to the investment thesis laid out in our initiation of coverage report The POS IS Strong with This One.”

And Tse has an “Outperform” rating and a one-year price target of (US) $350 on Shopify.

“We’re looking for an essentially in-line quarter for Shopify. Based on our work, it appears Shopify is cementing its lead position among SMBs while it’s stealthily scaling into larger enterprises. For the quarter, we’re expecting the Company to drive continued advances in International markets and its Advanced / Plus offerings. Bottom line, all sources point to continued execution,” he says.

NBF’s “Special Sits Tech” picks are Altus Group (Altus Group News, Stock Quote, Chart TSX:AIF), which Tse has an “Outperform” rating and one-year price target of $35.00, Baylin Technologies (Baylin Technologies News, Stock Quote, Chart TSX:BYL), which is covered by NBF analyst Andrew McGee, who has an “Outperform” rating and target of $6.00, and Tecsys (Tecsys News, Stock Quote, Chart TSX:TCS), also covered by McGee who has an “Outperform” rating and one-year price target of $18.00.

Tse’s “Larger Cap Legacy” picks are OpenText (OpenText News, Stock Quote, Chart Nasdaq:OTEX) for which he has an “Outperform” rating and target price of (US) $50.00, CGI Group (CGI Group News, Stock Quote, Chart TSX:GIB.A), which he rates as an “Outperfom” with a $120.00 target and Constellation Software (Constellation Software News, Stock Quote, Chart TSX:CSU), which he has a “Sector Perform” rating and one-year price target of $1200 on.