Top Tech stock picks for 2023 from Eight Capital

Investment bankers Eight Capital published on Tuesday a report outlining their top sector picks for the new year, with three technology stocks in the mix. 

2023 seems like a tougher year than most to gauge, with the path inflation takes being a dominating factor. With that in mind, Eight Capital’s 2023 Strategic Outlook & Top Sector Picks report listed three potential scenarios, beginning with one where inflation doesn’t subside quick enough, the labour market stays strong and the US Federal Reserve overtightens. In that case, there’s likely to be a protracted slowdown in housing and discretionary spend over the long term with the possibility of a deeper recession, Eight Capital said.

A second possibility sees inflation subside quickly and the economy sliding into a typical recession with a sell-off early this year followed by a new bull market, Eight Capital predicts, in the second half of the year. 

Finally, a third scenario has it that inflation subsides, the Fed backs off and the market lows we’ve already reached will be the nadir, pushing the market higher.

Eight Capital Head of Equity Research Nic Katsiyianis said Scenario Three is historically least likely, and thus, it’s best to concentrate on the soft and hard landings pictured in Scenarios One and Two. As for tech stocks, Katsiyianis said the second half of the year could prove interesting.

“Given that technology stocks have seen the largest losses, mostly due to higher rates and their effect on multiples, there could be pockets of opportunity in the sector as rates are expected to be nearing a peak, moreover, areas within tech such as cyber security are still in very high demand. We believe the sector could open up again for funding in the latter part of the year as the stronger business models attract long-term investors at more favourable valuations,”Katsiyianis wrote.

With that framework in mind, Eight Capital analyst Christian Sgro provided his “soft-landing scenario” top pick as Canadian online learning management platform D2L (D2L Stock Quote, Charts, News, Analysts, Financials TSX:D2L), saying he likes D2L’s long history and positioning as a leader in the LMS market. 

Sgro said there’s a bull case for the stock if academic and corporate spending increases at sooner-than-expected timeframes.

“We are ultimately positive on the share price potential this year because we think there is a material disconnect between D2L’s terminal profitability profile and the company’s current enterprise value of below $200 million. We expect the share price to outperform peers through the year as this financial profile becomes clear,” Sgro wrote.

As for the hard-landing scenario, Sgro gave the nod to VitalHub Corp (VitalHub Stock Quote, Charts, News, Analysts, Financials TSX:VHI), saying the healthcare technology solutions company has strong defensive attributes related to the resiliency in publicly funded healthcare along with VitalHub’s attractive profitability profile.

“We see shares performing well in any macroeconomic environment, and think there is the potential for more material outperformance in a hard-landing scenario,” Sgro wrote.

Finally, Eight Capital analyst Adhir Kadve gave as his soft-landing scenario top pick Canadian digital banking and payments solutions company Payfare (Payfare Stock Quote, Charts, News, Analysts, Financials TSX:PAY), saying that the gig workforce targeted by the company should stay strong during the current period of macroeconomic uncertainty, while Payfare is set to drive its business through a number of growth initiatives.

“The versatility and scalability of Payfare’s platform allows it to service both large and small gig platforms, with low incremental capex requirements which allows the company to be Adj. EBITDA and Cash Flow positive,” Kadve wrote.

Stock: D2L

Eight Capital rating: Buy

Eight Capital target price: $11.00

12-month projected return: 70 per cent

Stock: VitalHub

Eight Capital rating: Buy

Eight Capital target price: $5.00

12-month projected return: 85 per cent

Stock: Payfare

Eight Capital rating: Buy

Eight Capital target price: $17.00

12-month projected return: 242 per cent