National Bank note (stole from CVO page) but includes TCS While they do not expect the same degree of outperformance from Canadian technology stocks following a scorching 2023, equity analysts at National Bank Financial are projecting “still more upside” and see “an opportunity for a ‘catch up’ in small-mid cap name.”
“We can’t really talk about our coverage universe without discussing U.S. Technology given that market leads the broader group/market,” they said. “When looking at that, U.S. Technology was driven by the ‘Magnificent 7′ (2023 market cap. weighted return of 90 per cent). That said, there was a widening of breadth in late 2023. With respect to the broad indices, the S&P Info Tech index (ex. APPL, MSFT, and NVDA), BVP Emerging Cloud Index and S&P/TSX Info Tech Index were up 48 per cent, 40 per cent and 69 per cent, respectively, vs. the S&P 500 index up 24 per cent. In our view, that outperformance was driven by a flight to ‘quality’, a reversion from an ‘oversold’ 2022, AI hype, and recognition and action towards capital allocation discipline from the days of “growth at all cost.”
The analysts think the “volatile” rate environment in the U.S. “drove a flight to perceived relative ‘quality’ in large cap technology where scale, outsized relative growth, robust balance sheets/strong cash flow generation, and profitable became a place to hide.” While Canada does not possess similar megacap stocks, they think that a similar trend existed, noting the top 10 largest companies returned an average of 48 per cent in 2023.”
Entering 2024, they think Canadian tech stocks are “cheap on a relative basis,” seeing their coverage universe as “quite compelling from a valuation standpoint relative to the S&P Info Tech index, BVP Emerging Cloud index and the ‘Magnificent 7.’”
In a research report released Wednesday, they made five predictions for the year ahead: small-mid cap stocks will outperform their larger peers; an increase to the pace of M&A; profitability and capital allocation will drive stock performance; artificial intelligence hype will continue and IPO activity will return.
Seeing an “accelerated” pace of capital deployment and calling it a “disciplined allocator of capital,” the firm named Constellation Software Inc. (CSU-T) its large-cap pick for 2024, expecting more spin-offs of its business in the next 12 months.
“If you’ve been following our research, you’d know we’ve been calling for more potential spinoffs for Constellation given successful spinoffs of Topicus and more recently the Lumine Group,” analyst Richard Tse said. “We estimate Topicus and the Lumine Group have added approx. $1.4-billion and approx. $2.3-billion in value to CSU respectively since they began trading as separate publicly traded companies.
“We estimate Constellation’s pace of capital deployment exiting 2023 was 5 per cent ahead of consensus expectations. That outsized rate should fuel upside to growth. In our view, a concerted effort to fuel the pace of capital deployment is seeing execution. And with more than 40k potential targets in its pipeline, a comfortable leverage ratio of 1.0 times and approximately $1.2-billion in available liquidity, we think that pace of deployment should continue. We also think there’s upside to that number (i.e., 20 per cent year-over-year growth) given the Company’s willingness to target larger deal sizes in recent past (e.g., Optimal Blue, Allscripts’ Healthcare Assets, and WideOrbit).”
Analyst Richard Tse raised his target for Constellation shares to $4,300 from $3,400, keeping an “outperform” recommendation. The average target on the Street is $3,418.13, according to Refinitiv data.
“We continue to like CSU for its defensive attributes (recurring revenue and cash flow) and heightened growth profile given the accelerated pace of capital deployment,” he said.
The analysts also named OpenText Corp. (OTEX-Q, OTEX-T) as a top pick, keeping an “outperform” rating and US$60 target. The average is US$50.42.
“Bottom line, investors following our research will know OTEX remains one of our favourite ‘legacy’ names,” said Mr. Tse. “It’s also one we’ve been touting as notable in the current environment. Profitability and strong recurring cash flow offer investors compelling defensive attributes. We see a growing base of recurring revenue through opportunistic acquisitions, expanding operating leverage and optionality from organic growth (7 consecutive quarters of positive organic growth in CC) that is not fully reflected in its current stock price.”
Their “niche technology player picks” are:
* Coveo Solutions Inc. (CVO-T) with an “outperform” rating and $14 target. Average: $12.95.
Mr. Tse: “We see Coveo as a prime takeout candidate for either a strategic buyer or PE firm... We continue to like this name and would look to opportunistically wade in, particularly on pullbacks.”
* Converge Technology Solutions Corp. (CTS-T) with an “outperform” rating and $6 target. Average: $6.47.
Analyst John Shao: “For CTS, the past year has been volatile with paused M&A and a strategic review falling through. That volatility has also been reflected in the stock price and as a result, CTS is currently trading at a discount to peers. Looking ahead, we believe a consistent track record of execution and simplified growth story will drive the re-rating for CTS to close its valuation gap to peers. For a company in the ITSP business with a critical scale, the execution risk also looks moderate to us.”
* Tecsys Inc. (TCS-T) with an “outperform” rating and $50 target. Average: $46.75.
Mr. Shao: “Time has allowed Tecsys to scale and expand its platform into a growing logistics powerhouse within the healthcare and retail vertical. That fortification along with growth initiatives that include strategic and operational investments and acquisitions is putting Tecsys in a position to scale into broader markets. We believe Tecsys is on the cusp of scaling into a bigger company.”