The Tech market is looking good
If technology stocks are currently underpriced, then now is the time to get in
By Ian Harvey
April 6, 2011
April 6, 2011
It’s the road not taken that haunts most. Or, perhaps the stock not bought. And with the tech sector on the rebound, investors will increasingly wonder if they should be buying in. Case in point: in 1997 Apple’s stock had tanked and the company was on the brink of insolvency. Iconic founder Steve Jobs returned and Microsoft CEO Bill Gates announced an investment of $150 million into Apple, citing the importance of the Macintosh to its Office suite. It was a lifeline and set the stage for Jobs to hit a home run with the iMac.
Fourteen years later, Apple stock is north of US$356, and if Microsoft had hung on to that investment, it would be worth US$5.43 billion today.
With the tech-laden NASDAQ surging back like old times, could it be we’re set for a new era of dot-com activity much like in the late nineties before it all crashed in 2000?
Well, probably not. What’s different this time around is that tech stocks are lagging the field. The big industrials have fared better since the 2009 crash. “Technology stocks are so much cheaper than industrials right now,” said Francois Campeau at Triology Advisors, who manages CI Global Science and Technology fund, an industry award-winning mutual fund.
Campeau prefers software and hardware makers who feed off the spending of industrials. Thus, with the industrials back on solid footing, an IT spending cycle on upgraded PCs, servers, software and networking infrastructure is about to be unleashed.
It adds up to revenues which, in turn, will drive interest in share prices. “We’re already starting to see it in the software segment,” Campeau said. “SAP (XETRA:SAP.DE) had some strong numbers, as did (tech consultants) Accenture (ACN:US) and Oracle (NASDAQ:ORCL), which is a sign of strong demand from capital spending.”
Further, market capitalization for tech (the market value of all shares of a sector) as a percentage value of GDP is “clearly below the historic trend.” Taken in context with PE ratios (the stock price against company earnings per share), that suggests technology stocks are underpriced across the board.
Hewlett Packard (NYSE:HPQ), for example, recently had a PE of between 10 and 9.2, Campeau said, while the S&P average PE was 13.9. The business side of HP just keeps scoring highly: “They’re really evolved and extended. They’re a lot more like IBM, which is good.”
There are still some crazy valuations, much like during the dot-com boom when PE ratios soared into three figures as investors bet on future earnings, but generally, investors are a lot more cautious since the 2009 crash.
Still, predicting stock prices isn’t a science. Consider this: last year, 41 Wall St. analysts collectively predicted Apple’s (NASDAQ:AAPL) stock would hit US$428 within a year. On Feb. 18 it was US$350, a 20 per cent gap. Even then, Apple investors saw a better than 80 per cent return on their money if they bought last August at US$240, but the analysts were still off.
As we crawl out from under the wreckage of the recession, it’s the numbers that should do the talking, said BirchLeaf Investments founder Bob Floyd. “I look for devices that people want to use and that are functional and really have a place in the market first. But what I also want to see is revenue, (profit) margins and growth.”
It’s also important to look at the stage of the company’s business cycle, he said. Are customers ready to start buying? Have they completed their purchases and upgrades. Catching a good company at the start of its sales cycle could mean good growth in stock prices.
“What I don’t want are conceptual stocks: an idea which really isn’t in production yet or has no channels to get to market,” he said.
Look beyond the obvious
Of course, the technology sector extends far beyond Dell, HP, Microsoft (NASDAQ:MSFT), Intel (NASDAG:INTC) and Cisco. It encompasses health-care technologies, communications, nanotech, alternative energies and others. Floyd, for one, is leery of the alternative energy sector from an investment perspective, saying it’s a little early to pick winners.
ATS Automation Tooling Systems (TSX: ATA ) is a good example of this, he said. With offices in Canada, the U.S., France and China, it makes automation systems for factories to churn out high-tech devices and is itself a solar panel maker. Its new CEO has been cost cutting and reorganizing and is planning to break off the solar division to concentrate on the manufacturing equipment business. Floyd takes from this that the core business is doing well but the “glamour” division, the one making solar panels, is facing growing competition as others get into the market and margins shrink.
On the other hand, he looks for technology’s impact in unusual places. Food production, for example, is shifting into high gear amid global fears of shortages and rising prices, which means farmers will need to invest in new equipment.
Hemisphere GPS (TSX:HEM), a maker of tractor GPS navigation units, might be benefitting from this. The units monitor a tractor’s path down to a few centimetres, so fertilizer doesn’t overlap and burn the crop or go to waste. It does the same for seed. Hemisphere’s more advanced systems can automatically steer a tractor, so once a path is laid out, it can make that run again and again automatically.
Where the fish are
The philosophy of pros like Floyd or Campeau is much like seagulls following trawlers: go there, because that’s where the fish are. Picking out which trawlers are heading out to sea and which are coming home with a catch is what analysts and fund managers do.
For example, telcos need to invest in Internet bandwidth capacity because video sharing has soared among Web users. That means more demand for fibre optics, which in turn is why JDS Uniphase (TSX:JDSU) was predicted by 11 analysts to hit a price of US$25.04. It made US$28.28 and returned 205 per cent to investors who got in 12 months ago. It was available for US$7 a year ago.
Or consider Exfo (NASDAQ:EXFO), a Montreal-based provider of test and service solutions for fibre optics. With a global footprint of 1,600 people in 25 countries and 2,000 telecom customers, it is said to be a hot prospect flying under the radar. Or maybe the big news will be a trio of Canadian network players poised to reap capital spending: Sandvine (TSX:SVC), Bridgewater Systems (TSX:BWC) and Dragonwave (TSX: DWI).
Money in M&A
Duncan Stewart, director of Deloitte Canada Research, covers the technology, telecommunications and media sectors and thinks there are also some opportunities in the mid- and small-cap tech stocks, because the big dogs are sitting on lots of cash and are eager to make acquisitions before valuations start to move upward.
“M&As will continue because any company is for sale at the right price,” Stewart said, although he doesn’t comment on individual stock values. “And there are some good companies right here in our backyard in Canada.”
What Canadians—the hewers of wood and fetchers of water—tend to do well, he said, is provide the unglamorous underpinnings required for big innovations to succeed. The value in the shift to cloud computing and Software-as-a-Service may not be in hardware and software companies but in the smartphones, net-books and tablets, devices ideal for these types of applications. That would seem to point directly to RIM (TSX:RIM).
“I was at a conference in Europe where 17 out of 18 people had BlackBerrys, and one guy had two,” Stewart said. “Despite losing market share in North America, they’re still in a good position.”
Similarly, Descartes System Group (TSX:DSG) in Waterloo develops SaaS for the shipping industry and it generates about US$80 million a year in revenues.
Experts can point to a lot of gems, but the message all three delivered is that nearly three years after the meltdown and two years since the stock markets crashed, tech stocks look like a harbinger growth and job creation.
And who wouldn’t want to be in on that?
Photograph of BirchLeaf Investments founder Bob Floyd and Duncan Stewart, director of Deloitte Canada Research: Miguel Hortiguela
Also read:
No money for tech - Canadian SMEs
Fourteen years later, Apple stock is north of US$356, and if Microsoft had hung on to that investment, it would be worth US$5.43 billion today.
With the tech-laden NASDAQ surging back like old times, could it be we’re set for a new era of dot-com activity much like in the late nineties before it all crashed in 2000?
Well, probably not. What’s different this time around is that tech stocks are lagging the field. The big industrials have fared better since the 2009 crash. “Technology stocks are so much cheaper than industrials right now,” said Francois Campeau at Triology Advisors, who manages CI Global Science and Technology fund, an industry award-winning mutual fund.
Campeau prefers software and hardware makers who feed off the spending of industrials. Thus, with the industrials back on solid footing, an IT spending cycle on upgraded PCs, servers, software and networking infrastructure is about to be unleashed.
It adds up to revenues which, in turn, will drive interest in share prices. “We’re already starting to see it in the software segment,” Campeau said. “SAP (XETRA:SAP.DE) had some strong numbers, as did (tech consultants) Accenture (ACN:US) and Oracle (NASDAQ:ORCL), which is a sign of strong demand from capital spending.”
Further, market capitalization for tech (the market value of all shares of a sector) as a percentage value of GDP is “clearly below the historic trend.” Taken in context with PE ratios (the stock price against company earnings per share), that suggests technology stocks are underpriced across the board.
Hewlett Packard (NYSE:HPQ), for example, recently had a PE of between 10 and 9.2, Campeau said, while the S&P average PE was 13.9. The business side of HP just keeps scoring highly: “They’re really evolved and extended. They’re a lot more like IBM, which is good.”
There are still some crazy valuations, much like during the dot-com boom when PE ratios soared into three figures as investors bet on future earnings, but generally, investors are a lot more cautious since the 2009 crash.
Still, predicting stock prices isn’t a science. Consider this: last year, 41 Wall St. analysts collectively predicted Apple’s (NASDAQ:AAPL) stock would hit US$428 within a year. On Feb. 18 it was US$350, a 20 per cent gap. Even then, Apple investors saw a better than 80 per cent return on their money if they bought last August at US$240, but the analysts were still off.
As we crawl out from under the wreckage of the recession, it’s the numbers that should do the talking, said BirchLeaf Investments founder Bob Floyd. “I look for devices that people want to use and that are functional and really have a place in the market first. But what I also want to see is revenue, (profit) margins and growth.”
It’s also important to look at the stage of the company’s business cycle, he said. Are customers ready to start buying? Have they completed their purchases and upgrades. Catching a good company at the start of its sales cycle could mean good growth in stock prices.
“What I don’t want are conceptual stocks: an idea which really isn’t in production yet or has no channels to get to market,” he said.
Look beyond the obvious
Of course, the technology sector extends far beyond Dell, HP, Microsoft (NASDAQ:MSFT), Intel (NASDAG:INTC) and Cisco. It encompasses health-care technologies, communications, nanotech, alternative energies and others. Floyd, for one, is leery of the alternative energy sector from an investment perspective, saying it’s a little early to pick winners.
ATS Automation Tooling Systems (TSX: ATA ) is a good example of this, he said. With offices in Canada, the U.S., France and China, it makes automation systems for factories to churn out high-tech devices and is itself a solar panel maker. Its new CEO has been cost cutting and reorganizing and is planning to break off the solar division to concentrate on the manufacturing equipment business. Floyd takes from this that the core business is doing well but the “glamour” division, the one making solar panels, is facing growing competition as others get into the market and margins shrink.
On the other hand, he looks for technology’s impact in unusual places. Food production, for example, is shifting into high gear amid global fears of shortages and rising prices, which means farmers will need to invest in new equipment.
Hemisphere GPS (TSX:HEM), a maker of tractor GPS navigation units, might be benefitting from this. The units monitor a tractor’s path down to a few centimetres, so fertilizer doesn’t overlap and burn the crop or go to waste. It does the same for seed. Hemisphere’s more advanced systems can automatically steer a tractor, so once a path is laid out, it can make that run again and again automatically.
Where the fish are
The philosophy of pros like Floyd or Campeau is much like seagulls following trawlers: go there, because that’s where the fish are. Picking out which trawlers are heading out to sea and which are coming home with a catch is what analysts and fund managers do.
For example, telcos need to invest in Internet bandwidth capacity because video sharing has soared among Web users. That means more demand for fibre optics, which in turn is why JDS Uniphase (TSX:JDSU) was predicted by 11 analysts to hit a price of US$25.04. It made US$28.28 and returned 205 per cent to investors who got in 12 months ago. It was available for US$7 a year ago.
Or consider Exfo (NASDAQ:EXFO), a Montreal-based provider of test and service solutions for fibre optics. With a global footprint of 1,600 people in 25 countries and 2,000 telecom customers, it is said to be a hot prospect flying under the radar. Or maybe the big news will be a trio of Canadian network players poised to reap capital spending: Sandvine (TSX:SVC), Bridgewater Systems (TSX:BWC) and Dragonwave (TSX: DWI).
Money in M&A
Duncan Stewart, director of Deloitte Canada Research, covers the technology, telecommunications and media sectors and thinks there are also some opportunities in the mid- and small-cap tech stocks, because the big dogs are sitting on lots of cash and are eager to make acquisitions before valuations start to move upward.
“M&As will continue because any company is for sale at the right price,” Stewart said, although he doesn’t comment on individual stock values. “And there are some good companies right here in our backyard in Canada.”
What Canadians—the hewers of wood and fetchers of water—tend to do well, he said, is provide the unglamorous underpinnings required for big innovations to succeed. The value in the shift to cloud computing and Software-as-a-Service may not be in hardware and software companies but in the smartphones, net-books and tablets, devices ideal for these types of applications. That would seem to point directly to RIM (TSX:RIM).
“I was at a conference in Europe where 17 out of 18 people had BlackBerrys, and one guy had two,” Stewart said. “Despite losing market share in North America, they’re still in a good position.”
Similarly, Descartes System Group (TSX:DSG) in Waterloo develops SaaS for the shipping industry and it generates about US$80 million a year in revenues.
Experts can point to a lot of gems, but the message all three delivered is that nearly three years after the meltdown and two years since the stock markets crashed, tech stocks look like a harbinger growth and job creation.
And who wouldn’t want to be in on that?
Photograph of BirchLeaf Investments founder Bob Floyd and Duncan Stewart, director of Deloitte Canada Research: Miguel Hortiguela
Also read:
No money for tech - Canadian SMEs
