Pick your spots, that’s the advice from National Bank Financial analysts Richard Tse and John Shao, who recently published a Tech Sector third quarter earnings preview. By industry, they’re Underweight on Real Estate, at Market Weight for IT, Underweight for Commercial & Professional Services and Underweight Software and Services. All that doesn’t sound too hot, but Tse and Shao maintain that despite the stormy market environment, companies with solid fundamentals and operational direction are where investors should direct their attention. “Here’s the reality – while valuations in our coverage universe will be subject to outsized influence from macro factors under the current backdrop, strategic and operating execution on business plans will ultimately drive valuation re-ratings beyond the current volatility for the individual names,” Tse and Shao wrote in their October 19 report. Even so, growth-oriented stocks are likely to continue having outsized risk exposure over the short term, as profitability has become a more important investment criterion. Thus, to counter this, the analysts have singled out a few tech names with recurring revenue (cash flow), profitability and growth and they’ve pointed to CGI, OpenText and Constellation Software in this capacity. On the upcoming Q3 earnings season, Tse and Shao gave their list of companies with potential upside coming from the third quarter results (Coveo, Kinaxis, Lightspeed Commerce and Magnet Forensics) and those with potential downside risk from their Q3 numbers (E Inc, Farmers Edge, Nuvei, Q4 and Real Matters). Altogether, of the 25 names in NBF’s Technology universe, 21 have “Outperform” ratings, with Constellation Software getting a new promotion from “Sector Perform” to “Outperform.” Below are the first 12 those 25 stocks, including their price targets and projected returns, with the rest to follow in a later article. All listed returns are as of NBF’s report’s publication date and all figures are in Canadian dollars except where indicated otherwise. Stock: Altus Group (Altus Group Stock Quote, Charts, News, Analysts, Financials TSX:AIF) Rating: Outperform Year-to-date return: -30 per cent Target Price: $60.00 (was $70.00) Projected 12-month return: 27 per cent Tse continues to think that Altus is on track to its $400 million revenue target for its Altus Analytics segment by the end of 2023, given the strategic and operational moves by the company over the past year. Margin expansion is likely in the works for both AA and Altus’ Property Tax segments. “In the short term, we see some risk to the stock given the Tax headwinds noted above. We’d view any weakness in the stock care of those headwinds as an opportunity to wade in given the continued execution on the bigger valuation driving segment, AA. We also see potential option value from a move to incorporate more automation into the Company’s Property Tax segment,” Tse said. Stock: Blackline Safety (Blackline Safety Stock Quote, Charts, News, Analysts, Financials TSX:BLN) Rating: Outperform Year-to-date return: -71 per cent Target Price: $6.00 Projected 12-month return: 233 per cent Shao is looking for better-than-expected fiscal fourth quarter results from Blackline Safety, while at the same time the analyst said the upcoming quarter will be a test to see if the company can implement its cost reduction initiatives, as those will be key for modelling sustainable growth. Shao said for investors to watch for the company’s new G6 product to be a catalyst in the new year. “We believe Blackline’s technical edge comes from its connectivity that enables flow of data for greater visibility of employee activities and their work environment. Given reduced balance sheet risk and a positive outlook on growth and margin performance, we maintain our Outperform rating with a price target of $6.00 which implies an EV/Sales of 4.1x on FY2023E,” Shao wrote. Stock: CGI Inc (CGI Stock Quote, Charts, News, Analysts, Financials TSX:GIB.A) Rating: Outperform Year-to-date return: -5 per cent Target Price: $135.00 Projected 12-month return: 28 per cent per cent The short-term may be bumpy but a strong backlog should keep CGI’s recurring cash flow going, to the tune of a free cash flow yield for the upcoming fiscal year at about seven per cent, according to Tse. Heightened M&A is likely also in the cards for GIB.A with about $2.3 billion in available liquidity. “We continue to believe enterprises remain in the early days of digital transformation with ~68 per cent of CFO’s suggesting they have three or more transformation programs underway (per Accenture). It’s our view that CGI’s customer base provides even more opportunity,” Tse wrote. Stock: Constellation Software (Constellation Software Stock Quote, Charts, News, Analysts, Financials TSX:CSU) Rating: Outperform (previously Sector Perform) Year-to-date return: -20 per cent Target Price: $2,350.00 Projected 12-month return: 28 per cent In-line results are expected from Constellation Software for the third quarter, where the company is estimated to have deployed about $200 million in capital over the quarter. Tse noted that CSU has been aggressive in its capital deployment this year with about $1.5 billion already put towards acquisitions, nearly double his earlier estimate of what would be required to maintain a 15 per cent revenue growth rate for the 2022 year. Along with last year’s Topicus, Tse sees other potential spinoffs in the works for CSU. “In light of the accelerating pace of growth, moderating market valuations and the strong defensive attributes (recurring revenue and cash flow), we’re upgrading CSU to Outperform from Sector Perform based on a more constructive outlook for M&A and attractive defensive attributes,” Tse said. Stock: Converge Technology Solutions (Converge Technology Solutions Stock Quote, Charts, News, Analysts, Financials TSX:CTS) Rating: Outperform Year-to-date return: -36 per cent Target Price: $12.00 Projected 12-month return: 76 per cent No major surprises are expected from Converge’s third quarter, according to Shao, although another M&A move before the year is out could occur, with the temporary slowdown in the pace of acquisitions likely to give the analyst a chance to evaluate the revenue and cost synergies which make up his investment thesis on CTS. “Our investment thesis remains unchanged as we continue to believe Converge is undervalued for its M&A prowess and organic growth potential. We reiterate our Outperform rating with a target price of C$12 which implies a 4.0x EV/Gross Profit on F2023,” Shao wrote. Stock: Copperleaf Technologies (Copperleaf Technologies Stock Quote, Charts, News, Analysts, Financials TSX:CPLF) Rating: Outperform Year-to-date return: -77 per cent Target Price: $12.00 (was $14.00) Projected 12-month return: 116 per cent Investors can expect a seasonally low quarter with a sequential decline in revenue from Copperleaf, according to Shao, as some of the company’s perpetual license revenue has already been recorded in the previous quarter, while the company’s long sales cycle is also a factor. At the same time, Copperleaf has a highly scalable platform, according to Shao, with a “land-and-expand” strategy for the verticals it targets. “We’d note that long sales cycle, when paired with unfavourable market sentiment towards early Tech names, would somewhat be a near-term headwind for CPLF stock. We’re tweaking our price target to C$12 to reflect the sector-wide multiple contraction. That said, our long-term view remains optimistic given its product leadership in a niche market with little competition,” Shao said. Stock: Coveo Solutions (Coveo Solutions Stock Quote, Charts, News, Analysts, Financials TSX:CVO) Rating: Outperform Year-to-date return: -68 per cent Target Price: $13.00 Projected 12-month return: 152 per cent Tse said Coveo has consistently exceeded the profitability targets laid out at the time of its IPO last November, with management revising its guidance upwards on the longer-term. Tse noted that management has also made an alteration towards profitability in a nod to the current market sentiment, a positive from a relative valuation, he said. “We expect demand for Coveo’s Relevance platform to remain robust given increasing demand for personalized experiences. According to Invesp, a consulting company specializing in conversion rate optimization in North America, 75 per cent of customers are more likely to buy based on personalized recommendations while 54 per cent of retailers reported product recommendation as a key driver of AOV (average order value) in customer purchases,” Tse wrote. Stock: D2L Inc (D2L Stock Quote, Charts, News, Analysts, Financials TSX:DTOL) Rating: Outperform Year-to-date return: -59 per cent Target Price: $10.00 Projected 12-month return: 80 per cent Online learning platform D2L should deliver in-line results for its Q3, says Shao, and the analyst thinks management is not likely to lower its guidance for a third consecutive quarter, given that the proposed seven per cent growth rate looks conservative from a longer (included pre-pandemic) view on D2L. “As the Company shifts to a balanced- growth model, we expect D2L to breakeven within the next 12 months. That positive outlook, when compared with a high quality recurring revenue stream and a valuation multiple less than 1.0x is why we maintain an Outperform rating,” Shao said. Stock: Docebo (Docebo Stock Quote, Charts, News, Analysts, Financials TSX:DCBO) Rating: Outperform Year-to-date return: -58 per cent Target Price: US$60.00 (previously US$85.00) Projected 12-month return: 118 per cent Early COVID-winner Docebo may have some downside risk to revenue but upside potential to EBITDA in its Q3 earnings, according to Tse, with the company’s underlying fundamentals and size of its customers underscoring Docebo’s growing market share. “This remains one of our favoured growth names. We reiterate our Outperform rating, albeit with a revised target price of US$60.00 (was US$85.00) to reflect revised inputs to our against the current macro backdrop,” Tse wrote. Stock: E INC (E INC Stock Quote, Charts, News, Analysts, Financials TSX:EINC) Rating: Sector Perform Year-to-date return: -73 per cent Target Price: $5.50 (previously $10.00) Projected 12-month return: 11 per cent Weak-looking industry data points are cause for Tse’s tone of caution on car auction platform E INC, with used vehicle volume indicators heading down over the third quarter. A tight supply chain backdrop along with higher prices and tighter credit conditions are all playing a role. For now, Tse said he’s sticking to the sidelines. Stock: Farmers Edge (Farmers Edge Stock Quote, Charts, News, Analysts, Financials TSX:FDGE) Rating: Sector Perform Year-to-date return: -84 per cent Target Price: $0.50 (previously $1.00) Projected 12-month return: -7 per cent High inflation for key agricultural inputs are a concern with Farmers Edge, says Tse, and while the company’s carbon offsets business could be a potential opportunity, the analyst said it’s too early to price that into the stock. Plus, there’s risk to FDGE in light of cash challenges, Tse argued. “With the entire C-level Management team departing the company since its IPO, it’s further challenged by the Company’s cash position with ~$9.0 million in cash under an expected burn rate of ~$60.8 million over the next 12 months,” he said. Stock: Kinaxis (Kinaxis Stock Quote, Charts, News, Analysts, Financials TSX:KXS) Rating: Outperform Year-to-date return: -17 per cent Target Price: $250.00 Projected 12-month return: 71 per cent Continuing global supply chain challenges should keep the tailwinds blowing for Kinaxis and its RapidResponse platform, according to Tse, who said Kinaxis’ pipeline has been accelerating with over 50 per cent year-over-year growth coming from new customers over the first half of the year. Due in large part to COVID, supply chain software vendors have seen a two to five times increase in deal flow over the past two years, Tse said, and KXS should have a similar increase in its business. KXS should deliver solid Q3 numbers and the stock remains one of NBF’s favourite names. “We continue to believe KXS’s valuation does not fully value a ‘normalized’ financial run rate looking ahead, particularly given what we estimate to be a market share of less than ten per cent. With our expectations for accelerating momentum over the next 12-24 months, we reiterate our Outperform rating and target price of $250 target,” he wrote. Cantech will report on the remaining stocks from National Bank tomorrow.