Canadian technology companies are often overlooked by investors. That’s too bad: The sector has been demolishing the Canadian benchmark index over the past year and keeping up with the mighty Nasdaq Composite Index, home to tech giants Apple Inc., Amazon.com Inc. and Google.
Is the sector worth a closer look?
There are just 12 information-technology companies within the S&P/TSX Composite Index. Their combined market capitalization is about $80-billion, accounting for a mere 3.8-per-cent weighting in the broad index.
To put that into perspective, financials account for 34 per cent of the index and energy stocks account for nearly 20 per cent. The entire technology sector is about the same size as Suncor Energy Inc.
As a result of this slim profile, most tech-focused mutual funds take a global perspective, with only a passing interest given to Canadian stocks.
The iShares S&P/TSX Capped Information Technology Index exchange-traded fund gives exposure to the entire technology sector, but it has attracted only $109-million in assets – a curiosity next to the $9.9-billion iShares S&P/TSX 60 Index Fund.
Yet, the strong returns by Canadian technology stocks suggest that the sector has potential for rewarding investors who want exposure to something that is a little more interesting than oil or net interest margins.
Consider the recent performance. Over the past 12 months, the Canadian information-technology sector has gained 18.1 per cent, versus a decline of 0.4 per cent for the S&P/TSX Composite Index. Energy stocks and materials stocks are down, while financials are up just 2 per cent.
Nasdaq has outperformed the Canadian technology sector slightly, with a gain of 20.9 per cent over the past 12 months, for a lead of 2.8 percentage points.
But Canadian tech companies have the lead so far in 2018, with a gain of 10 per cent – better than the 3.5-per-cent gain for Nasdaq and the 4-per-cent decline for the S&P/TSX Composite Index.
The Canadian technology sector has enjoyed good days before only to see disappointment. Nortel Networks was the top-weighted stock in the benchmark index during the technology bubble of the late 1990s, until the company stumbled and investors were wiped out.
Research In Motion, now BlackBerry, was also once the top-weighted stock in the index during the early days of smartphone technology. But its share price has fallen more than 90 per cent since 2008 as rivals took over the smartphone market.
Over the past year, though, the Canadian technology sector has been powered by more than half a dozen strong performers. The relatively broad gains imply that the rally could have more staying power at a time when Canadian university graduates are highly prized for their expertise in fields such as artificial intelligence, and foreign students are drawn to Canada.
Shopify Inc., which operates an online commercial platform for retail merchants, has seen its share price decline from its highs in March. Nonetheless, the stock is up 52 per cent over the past year, giving the company a market capitalization of $16.5-billion.
There are no annual profits here yet. But revenue continues to increase at a brisk pace, rising 71 per cent in the fourth quarter, year over year.
Toronto-based Constellation Software Inc. acquires software businesses. The shares are up nearly 41 per cent over the past year, and more than 17 per cent in 2018.
In a research note last week, RBC Dominion Securities analyst Paul Treiber said he is expecting that the company’s recent acquisitions will drive revenue up 31 per cent in the first quarter, also year over year, for the strongest growth in three years. He raised his target price on the stock to $1,000, from $950 previously.
Mitel Networks Corp., based in Kanata, Ont., is smaller, with a market capitalization of just $1.6-billion. But the shares of the networking company are up a blistering 25 per cent this year. Revenue rose 31 per cent in the fourth quarter.
If you’ve been frustrated by the lack of diversification in the Canadian benchmark index, tech stocks could be what you’re looking for.