In the hunt for tech stocks for 2020? National Bank Financial analyst Richard Tse has you covered with a handful of solid out-performers —and a few dark horses to look out for, too.
On Tuesday, Tse delivered to clients his reflections on the year ahead, saying that a shift in mindset away from revenue momentum stocks is likely to persist in the year ahead.
It’s no secret that after the significant pullback over the fourth quarter of 2018, technology stocks had a veritable field day in 2019. The S&P Technology Index was up 48 per cent for the year compared to 29 per cent for the S&P 500.
Tech names ruled in Canada, too, with names like Shopify (Shopify Stock Quote, Chart, News TSX:SHOP), Lightspeed POS (Lightspeed POS Stock Quote, Chart, News TSX:LSPD) and Kinaxis (Kinaxis Stock Quote, Chart, News TSX:KXS) all posting handsome returns. Where the TSX Information Technology Index was up 65 per cent versus the S&P/TSX Composite which was up 20 per cent.
And while some high-flying tech momentum names are likely to have big years in 2020, one of the major lessons from 2019 surely was the surprisingly dismal performance by much-hyped tech IPOs in the US. Lyft, Uber, Pinterest and Slack all underwhelmed in their debut years while the financing failure of WeWork further underlined the idea that the market had grown weary of tech companies who seemed to favour exponential growth over profitability.
In his report, Tse crunched the numbers and found that there was a shift in market preference in 2019 towards tech names with more sustainable business models. Tse showed that on the whole in 2019, tech companies with positive stock returns also had positive free cash flow yields, whereas those burning cash had negative returns overall. Notably, that scenario was flipped in 2018 where the high-returning stocks had negative free cash flow yields.
The conclusion? Profitability matters.
As do industry trends, such as the emergence of 5G networks which Tse argues should benefit Canadian tech names in fields such as IT Services, e-commerce and POS and Robotics.
“It should be no surprise that the focus across the Technology sector in recent years has been revenue momentum,” writes Tse. “And if we look to the strength in the sector so far in 2020, one might think that course will hold. We think there are many reasons for that to be the case.”
“Having just returned from CES last week, we can tell you the dominant theme this year was 5G and the potential for that underlying infrastructure to support new opportunities across all Tech from infrastructure to new services and applications,” he wrote.
All told, Tse picked six names to highlight as stocks given an “Outperform” rating, along with three stocks rated “Perform” which could surprise in 2020.
Tse likes CGI Group (CGI Group Stock Quote, Chart, News TSX:GIB.A) — “Outperform,” $120.00 target — saying that the IT services company should continue to move up the value chain by increasing the proportion of its revenue coming from higher margin business in IP and digital, both organically and through acquisitions.
An expanding product portfolio and growing pipeline are good signs for Kinaxis — “Outperform,” $155.00 target — according to Tse, while investors should expect Lightspeed POS — “Outperform,” $52 target — to scale up its payments segment as the company looks to continue its pace of M&A activity. (All figures in Canadian dollars unless where noted otherwise.)
With a push to further monetize its customer base, OpenText (OpenText Stock Quote, Chart, News TSX:OTEX) — “Outperform,” US$50 target — should have another great year, Tse says, while high-flying Shopify — “Outperform,” US$450 target — also gets the nod for both the potential underlying its fulfillment network and a belief that international expansion is about to balloon for the e-commerce company.
Finally, Tse gives an “Outperform” and $17 target price to mortgage lending and insurance software firm Real Matters (Real Matters Stock Quote, Chart, News TSX:REAL), which tore up the charts in 2019 but still has a lot of runway that’s currently not reflected in the stock, according to Tse.
For 2020 dark horses, Tse says to look out for Absolute Software (Absolute Software Stock Quote, Chart, News TSX:ABT) — “Sector Perform,” $8.50 target — Maxar Technologies (Maxar Technologies Stock Quote, Chart, News TSX:MAXR) — “Sector Perform,” US$16 target — and Mediagrif (Mediagrif Stock Quote, Chart, News TSX:MDF) — “Sector Perform,” $8 target.