| Power Lunch and ... |
a Power Lunch*
and a feature story
- on you - in Backbone
and an iPhone or a BlackBerry
To enter...
Fill out a readership survey
(confidential)
*with Dave Chalk, technology expert and our editor, Peter Wolchak |
|
|
| Taking Stock of Tech |
November 10, 2005 |
By Gail Balfour
THERE ARE MANY GREAT CANADIAN TECH COMPANIES, BUT TRACKING DOWN A GOOD INVESTMENT OPPORTUNITY MAY BE TOUGH. HERE’S WHY.
It’s a story that’s been told so many times it almost smacks of urban legend - except it really happened.
It’s the late 1990s. People with little or no investment expertise suddenly are making a killing on the stock market - pouring their money into overnight-sensation technology companies and making a quick, ridiculous profit. Jump ahead to 2000. These same investors are losing their shirts when the now-infamous dot-com bubble pops. The lucky ones get out early. For the rest there is a hard lesson to be learned - the stock market can be a dangerous and unforgiving place for the inexperienced.
David Wright, who has followed the technology market for years, recalls the heady late ’90s as more than a bit surreal. “There was a period in time where people who had no experience in the market, no specific training and no particular knowledge of the companies they were investing in, were outperforming professionals in the industry,” said Wright, managing director, software and services analyst at BMO Nesbitt Burns in Toronto.
“So that’s when we - as industry professionals - realized that there was something wrong in the marketplace. You sit back and you say ‘How can this be happening?’”
Then the air went out of the inflated market and people, understandably, got turned off tech investing for awhile, he said.
“In 2001, there was no interest (in tech stocks) at all. Whereas today, there are some companies doing well...but it’s in pockets,”
Wright said. “What individuals often forget is that the stock market is constantly looking forward...so really where money is made is when you think you can outsmart the market.”
The tricky part is constantly trying to differentiate between what people’s expectations are and what they should be, he added.
“People were chasing the hot performance numbers and they got burned. It’s not the first time this kind of thing has happened in the investing world, and it won’t be the last,” said Rudy Luukko, investment funds editor for Morningstar.ca in Toronto.
Vanishing tech stocks
The Toronto Stock Exchange (TSX) looks quite different now than it did then. In the ’90s its highs were driven largely by technology stocks. Now, when most people think of tech stocks in Canada there are only two names that typically come to mind: Research in Motion (RIM) and Nortel - also known as “the Two Whoppers,” said Bob McWhirter, president and portfolio manager of Selective Asset Management in Toronto.
“So really, what we are asking is what do the Whoppers look like? And the answer is that they look interesting,” McWhirter said. “Generally, tech (stocks) look better today than they did (last year), assuming that analysts’ estimates for 2006 come true.
“In some respects, we are a little bit like the farm team for the big U.S. technology companies.”
- Ben Kaak, PricewaterhouseCoopers
“And obviously, that’s a big if.”
According to Luukko, Canada’s tech market today is a shadow of its former self - accounting now for only about five per cent of the index; and proportionally smaller than the U.S. IT sector, which makes up about 15.5 per cent of its total index.
“So, compared to the U.S., Canada is very much under-represented in IT. That’s not to say that we don’t have a lot of technology companies here - they just carry far less heft in the market as a whole at the index level.”
Ben Kaak, a partner and tech practice leader with PricewaterhouseCoopers (PwC) LLP, in Toronto, agreed. “People say there aren’t a lot of big tech names (in Canada). You could argue if that’s true or not, but if you compare it to the U.S. pool of tech stocks it certainly is a lot more shallow swimming,” Kaak said.
“And there isn’t a very good vehicle (for investing in private Canadian tech companies), apart from labour-sponsored funds. But even those are kind of disappearing.”
Labour-sponsored funds were created to provide financing to high-risk Canadian start-up companies too small to go public. When you buy a labour fund, the government gives you a tax rebate. However, labour fund investors are required to hold the fund for at least eight years, and fund managers usually also take advantage of the tax breaks by charging abnormally high management-expense ratios (MERs) and back-end loads.
Many private ventures
Still, there are many more successful technology companies in Canada than people realize, Kaak said. The problem for potential investors is that many firms get bought out by U.S. companies before they can ever go public. That means the majority of potential investors never even get a chance to buy stocks in the rising Canadian stars.
“People would look at that negatively and say, ‘That’s awful - all these great Canadian companies are getting bought out.’ That’s one approach,” he said. “But you could also take the viewpoint that, in some respects, we are a little bit like the farm team for the big U.S. technology companies. We develop [small tech firms] and grow them to a certain size. Typically then, they look to get acquired - and it’s the Americans who will buy them and take them to the next level.”
There is a downside to this, Kaak admitted. This is often seen as a technology drain, or as selling out. But there is also a positive side; people who start up one company go on to start others.
“Now they are experienced, and they are much better at their second start-up than they were at their first. You are getting a whole rejuvenation and a whole population of experienced entrepreneurs who’ve been successful once (already),” he said.
“A lot of people look at [buyouts] negatively. I look at it like...you are creating new players for the next game.”
Still, that doesn’t change the fact that these homegrown companies are not being traded publicly. As a result, the tech stock market in Canada is pretty slim and people are turning to more conservative investment approaches.
One such approach is the income trust market, according to Ross Sinclair, national leader for PwC’s IPO and income trust services in Toronto.
“The biggest growth area in today’s IPO market is that there’s a great appetite for companies with established cash flow - that’s why the income trust market is very hot...it is a better tax structure to deliver distributions to shareholders.”
Sinclair also remembers the Internet boom as a “frenzy” and said today both tech stock prices and investors are more realistic.
Different pictures:
emerging Canadian and american
software companies
• Ninety per cent of emerging Canadian companies expect to be acquired by another company
• Only 35 per cent expect to exit through an IPO
• On average, U.S. firms surveyed had more than twice the R&D staff of Canadian firms (42 vs. 20), and four times the number of direct salespeople (20 vs. 5)
• U.S. firms generally don’t believe software pricing is an issue; Canadian firms do
• Canadian companies are half-owned by founders; U.S. companies are 54 per cent owned by venture capitalists, and only 15 per cent by founders
• In Canadian companies, 75 per cent of the CEOs are founders, and only 25 per cent have previous CEO experience; in the U.S., only 40 per cent are founders, but 65 per cent are run by experienced CEOs
Source: PricewaterhouseCoopers 2004 CEO survey of emerging Canadian software companies
“For example, look at the company 7/24 - the technology for banking through your cellphone. At its peak it was trading at $350 a share. It’s at $4 today,” he said. “A lot of those technology companies are still here today. It’s just not the unbridled euphoria that was exhibited previously.”
Investment advice
So, do any of these experts have advice for the average Canadian investor?
“Get a broker and do your homework. You really have to understand what you are buying, understand the management of the companies, understand the markets they are operating in and understand their technology advantages. And then you can maybe buy stuff,” Kaak said.
“Otherwise, if you don’t want to do that kind of work, then you should be buying mutual funds.”
According to Luukko, the best strategy may be the age-old advice: diversify.
Don’t put all your money into just one kind of investment.
“Focusing on one particular sector - as many people have found out the hard way - can be a real recipe for hardship if that sector performs poorly compared to the market as a whole. That is exactly what happened in the case of technology.”
Kaak added that if you are the type of investor who likes high risk, then you might want to devote a percentage of your portfolio to some specific tech names that have shown volatility in the past. But again, if you buy those you need to be pretty savvy.
“Make sure you know what you are buying, what price you are paying and what price you should be getting out at,” he advised.
“Most people don’t have the patience for that.”
|
|
|
| Top 300 Issue |
 
|
| Gadget of the Week (Canadian) |
|
Boost your cell
ARC Wireless Freedom Blade
Mobile data and voice are great, as long as the signal is strong. And while mobile networks are pretty good these days, road warriors quickly discover that dead zones still exist.
more>>
|
| Gadget of the Week (Japanese) |
Sounds of Japan
Why record just the visual when you can capture the sounds as well.
more>> |
| Backblog RSS feed |
Click to subscribe  |
|
sponsored by 
