Topicus.Com Inc V.TOI

TD Model Portfolio

[retiredcf]

Canadian Small-cap Model Portfolio

Information Technology

We are adding Topicus.com Inc. (TOI) at a 3.0% portfolio weighting.

Technology and related growth equities have surged in 2023, with the S&P 500 Information Technology sector up 39.6%. With risks arising among the more cyclical sectors such as the financials (banking uncertainties), energy (uneven demand, falling oil prices) and industrial metals (slowing China economy), investors have turned to growth. Although potentially further rate hikes and high valuations remain headwinds, we believe that the limited sector alternatives and the rising interest in A.I. could support future price gains for growth-related equities. Also supporting this view is the technical breakout in the NASDAQ 100 last month to a new 52-week high — the first 52-week high since November 2021 (a span of nearly 18 months). Typically, when the NASDAQ 100 sets a new 52-week high after more than six months without one, more strength follows. As we detail in Exhibit 1, there have been 13 previous occurrences since 1990, and each time, the index was higher 12 months later, with a median return of 14.9%.

Given the above views, and the widening out of the relative strength in technology to smaller caps (Exhibit 2), we are increasing our sector exposure with Topicus. The addition of Topicus is the result of a revenue growth screen that we developed (Exhibit 3). Focused specifically on the Canadian technology sector, we have ranked small- and large-cap names based on their most recent quarterly revenue growth (year-over-year). In our view, revenue growth is an essential factor in the Canadian technology landscape with the prevalence of negative or not meaningful earnings within the sector. Ranked near the top of our screen is Topicus, with 32.5% year-over- year quarterly revenue growth (Exhibit 4). After a parabolic COVID-led rise, Topicus fell out of favour in 2022, along with many equities within the technology sector, as revenue growth declined. However, after bottoming in late-2022, Topicus has rallied 60.9%, including a 13.7% rise since reporting Q1/F23 results last month and a technical breakout yesterday to a new 52-week high. Topicus' share-price recovery has been supported by the positive turn in revenue momentum, in our view. We prefer Topicus to top-ranked Coveo Solutions Inc. (CVO), given its larger market float ($4bln to $380mm) and higher liquidity.