National Bank Financial says these are the best Canadian tech stocks

COVID-19 has made investing a trickier business but National Bank Financial analyst Richard Tse is here to help with breakdown of the Canadian technology sector. He delivered to clients on April 23 a calendar Q1 2020 preview.

Tse said that focusing on names with strong defensive attributes will be key over upcoming quarters and has picked seven stocks with “Outperform” ratings.

As we continue through first quarter earnings season, we’re seeing almost all corners of commerce being hit in some fashion by the COVID-19-inspired worldwide clampdown, which for the most part is given partial treatment in companies’ first-quarter reports.

But even as the bigger impact won’t be seen until further down the road, there will be clear indicators in the Q1 numbers whether companies have the fortitude to endure the current crisis and come out swinging on the other side.

Tse said to look for strong balance sheets and cash flow in tech companies.

“It’s really the nuances beyond the headline revenue and earnings that will make the difference in terms of how we see our names executing on their growth initiatives in 2021 and more likely 2022,” Tse wrote.

“The reality is that as bad as 2020 numbers could be, we’re of the view that the market will eventually move to price in 2021 and 2022 and from that perspective, we remain quite bullish on our sector beyond this crisis as the secular growth drivers for technology won’t go away – if anything, we see an acceleration in some of those drivers,” Tse said.

Tse and National Bank have revised their estimates on its coverage universe of tech names and he commented that changes in profitability forecasts turned out more severe than revenue reductions, due to operating costs as companies look to maintain headcounts and other fixed costs during the COVID-19 era.

As such, many names have had their price targets cut, but there are still some winners out there. Here are Tse’s picks for stocks with Outperform ratings over the next 12 months.

IT consulting and systems integration giant CGI Group (CGI Group Stock Quote, Chart, News TSX:GIB.A) get the nod with a $100.00 target, representing an 18 per cent return. (All returns are as of publication date.)

The National Bank Financial analyst says CGI will be negatively impacted by a combination of travel restrictions and a delay in discretionary projects for its customers, along with a potential delay in converting CGI’s backlog. But as companies look to accelerate technology adoption down the road, this name will do well.

Learning management system vendor Docebo (Docebo Stock Quote, Chart, News TSX:DCBO) will also be a winner, Tse said, who gave the stock a $20.00 target representing a projected return of 30 per cent, arguing that Docebo will benefit from an increase in inbound interest as enterprises look to increase their operations in virtual environments.

Supply chain management company Kinaxis (Kinaxis Stock Quote, Chart, News TSX:KXS) continues to be one of Tse’s favourite names, despite the strength of the stock in recent months. Look for KXS to benefit from a turn towards more effective supply chain management by companies during the current pandemic. Tse gave Kinaxis a $150.00 target, representing a projected return of 14 per cent.

While point-of-sale platform Lightspeed POS (Lightspeed POS Stock Quote, Chart, News TSX:LSPD) had a rough first year out of the gate and will undoubtably feel the pain of COVID-19 —its clients are bricks and mortar and restaurants— Tse said the company has ample liquidity to ride through the storm and be on the upswing by the end of 2020. LSPD gets a $30.00 12-month target, representing a projected return of 50 per cent.

Tse also likes the defensive attributes of enterprise software company OpenText (OpenText Stock Quote, Chart, News TSX:OTEX) with its 73 per cent recurring revenue, with many of OTEX’s solutions viewed as essential aspects to its customers’ software stack. Outperform rating with a US$45.00 target, implying a return of 23 per cent.

Real estate platform Real Matters (Real Matters Stock Quote, Chart, News TSX:REAL) was a star in 2019 and has sloughed off with ease the COVID-19 market pullback, but Tse said there’s more where that came from. Tse pointed to continued strength in the company’s US Mortgage Refinancing market as key, giving the stock a 12-month target of $20.00, which implied a return of 28 per cent.

Finally, what else needs to be said about Shopify (Shopify Stock Quote, Chart, News TSX:SHOP)? the National Bank Financial analyst said while the company’s current activity levels are impressive, it’s the unchanged longer term picture of incremental growth drivers that should catch investors’ attention. “Outperform,” with a US$700.00 target, implying a return of 13 per cent.