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January 10, 2021

Best Canadian Tech Stocks to Look at in 2021

Disclaimer: The writer of this article may have positions in the securities mentioned in this article. The fact they hold positions in securities has had no impact on the production of this article

By Mathieu Litalien

January 10, 2021

Over the past five years, the S&P 500 and the TSX Technology Indexes have a CAGR of approximately 25%. 

Tech companies, especially in Canada, are booming right now. Which is exactly why we decided to come out with this list of the best performing technology stocks in Canada.

People usually head to the United States when looking for the best tech stocks to buy. So why is that? 

Tech stocks just aren't as prevalent on the TSX

The IT sector accounts for over a quarter of the S&P 500. 

Recently, the major indices underwent a sector reshuffle, however technology still accounts for 25.76% of the index. It is almost double that of the second largest sector. 

However, Canadian stocks in the technology sector accounts for only 9.3% of the TSX Index.  

Although it doesn't seem like much, it is a 130 basis point increase from where it was last year.

As you can see, the lack of Tech-listed companies on the TSX has hampered the overall performance of the Canadian markets. 

The good news? The lack of performance can lead to a lack of awareness. Thus, comes opportunity.

Even though the TSX’s IT sector is small, there are plenty of good investments.

The U.S. has its FAANG (Facebook, Amazon, Apple, Netflix, Google) stocks, but did you know Canada has its own acronym of tech all-stars?

Ryan Modesto, chief executive of 5i Research, coined the acronym “DOCKS” to reference Canada’s own FAANG stocks.

The five stocks include

  • Descartes Systems
  •  Open Text
  •  Constellation Software
  •  Kinaxis
  •  Shopify

A well-balanced portfolio should have exposure to the IT sector and you don’t have to go south of the border with US tech stocks to find it.

With that in mind, here are some of the top performing tech stocks in Canada right now.

Nuvei (TSE:NVEI)

Going off the board with this pick, Nuvei (TSE:NVEI) is one of Canada’s newest IPOs.

The company went public in August and its share price has performed quite well.

As of writing, Nuvei’s share price is up by ~24% in just over two months of trading. Not a bad return for those who got in early.

Is the jump in price justified? When compare to the valuations that peers commanded, we felt that the company’s IPO pricing did not do the company justice.

As we discussed with Premium members, there was a price disconnect which offered an attractive risk to reward opportunity.

Prior to listing, Nuvei was the largest privately held fin-tech company in the country. The company provides payment-processing technology for merchants.

Their suite of products serves both online and in-store transactions and counts Stripe, Paypal, Fiserv, Lightspeed POS, Global Payments, Shift4 Payments and WorldPay among its competitors.

On a trailing twelve-month basis, Nuvei generated US$324M in revenue and US$34B in gross transaction value (GTV). Nuvei grew revenue by 64% in fiscal 2019 and through the first 6 months of 2020, revenue is up by 73%.

Since going public, the company has attracted plenty of attention. There are 13 analysts covering the company – 9 rate it a “buy” and 4 rate it a “hold”.

Although the company is not yet profitable, the expectation is for the company to turn a profit next year. They also expect 26% average annual revenue growth over the next couple of years.

It is important to note, that newly listed companies carry additional risk. For its part, Nuvei has yet to report earnings since it went public.

Can it meet lofty estimates?

New listings are particularly vulnerable to performance as compared to expectations. Given this, IPOs such as Nuvei are most appropriate for investors with a higher risk profile.

Performance of Nuvei Vs TSX since its IPO

Market Cap: $7.36 billion
Forward P/E: N/A
Price to Sales: N/A
5 Year PEG: N/A
Sales estimates for next year: Premium Members Only
Earnings estimates for next year: Premium Members Only
14 Day RSI: Premium Members Only

Kinaxis (TSE:KXS)

After several years in which it provided consistent and solid returns, Kinaxis’ (TSE:KXS) stock exploded in 2019 and has continued this outperformance in 2020.

In 2019, the company’s stock price jumped by 42% and thus far in 2020, it has returned 111%.

In September, it was named to the TSX30 – a ranking of the top performing TSX-listed stocks over the past three years. Kinaxis ranked 26th with total returns of 140%.

Kinaxis’ crown jewel is RapidResponse, a cloud-based subscription software for supply chain operations. Not surprisingly, demand for reliable supply chain management software is at an all-time high.

Globalized companies are dealing with complex issues, more so as COVID-19 mitigation efforts are impacting the supply chain in a big way.

Economic and border shutdowns are causing havoc, and platforms such as RapidResponse are essential in minimizing supply chain disruptions. 

On the flip side, the pandemic has negatively impacted legacy customers. Some have been unable to renew contracts, or deferred projects. The good news is that the company is winning more business than it is losing.

One of the previous knocks on the company was the lack of diversification.

At one point, Kinaxis’ top 10 clients accounted for more than 50% of sales and as of last update, the Top 10 account for only 32% of revenue.

Although recent performance has been impressive, the company has one of the lower expected growth rates on this list. Over the next couple of years, the company is expected to grow revenue and earnings by the high teens.

Given this, investors should be paying attention to the company’s valuation. This is not a stock that should be trading at the same levels as hyper-growth stocks which are generating growth of 50% annually.

5 year performance of Kinaxis vs TSX

Market Cap: $4.71 billion
Forward P/E: 132.28
Price to Sales: 20.87
5 Year PEG: 6.48
Sales estimates for next year: Premium Members Only
Earnings estimates for next year: Premium Members Only
14 Day RSI: Premium Members Only

Descartes (TSE:DSG)

Much like Kinaxis, Descartes (TSE:DSG) is benefiting from a complex and globalized supply chain. Descartes is a global provider of federated network and global logistics technology solutions.

It provides a full range of logistic and network solutions that connects trading partners. Descartes has more than 20K customers across 160+ countries.

Descartes operates the world’s largest multi-modal and neutral logistics network with high profile partners including UPS, Home Depot and Air Canada to name a few.

As governments worldwide face the prospects of additional shutdowns, logistics are of the utmost importance. The company’s addressable market is estimated to be worth more than US$4 trillion.

In terms of reliability, Descartes has been one of the most consistent tech stocks on the TSX Index. Over the past five-years years, the company has grown earnings at a rate of 13.78% annually and over that time, the stock has returned more than 223%.

What can investors expect moving forward? Much of the same.

Analysts expect the company to grow earnings by approximately 19% annually over the next couple of years.

The company is laser focused on the higher-margin service revenues and on transitioning existing clients from its legacy license-based structure to its services-based structure.

Furthermore, the company is a serial acquirer. Since 2014, the company has closed on 24 acquisitions for total considerations of ~$US820 million.

Despite a challenging environment in 2020, in early November it announced the acquisition of ShipTrack for $25 million, its third acquisition of the year.

5 year performance of Descartes vs TSX

Market Cap: $6.2 billion
Forward P/E: N/A
Price to Sales: 18.5
5 Year PEG: N/A
Sales estimates for next year: Premium Members Only
Earnings estimates for next year: Premium Members Only
14 Day RSI: Premium Members Only

Enghouse Systems (TSE:ENGH)

Arguably the most underrated stock on this list, Enghouse Systems (TSE:ENGH) has ben among the top performing technology stocks for the past decade.

The company is one of the least-followed and known on this list, yet it has quietly outperformed some of the bigger names.

It develops enterprise software solutions for a range of vertical markets. It has benefited from the current pandemic in that it specializes on ERP solutions for remote work.

Given many companies have now made work from home a permanent option for staff, Enghouse is ideally situated to benefit.

The company’s stock price has averaged ~27% annual growth over the past five years and it is on pace to exceed this pace of growth in 2020 with gains of 46% year to date.

Pandemic or not, Enghouse continuously delivers. The company has also been named to the TSX30, coming in at #15 with total returns of 185%.

Let’s put Enghouse’s long-term performance into further perspective.

A $10,000 investment in the company a decade ago would be worth more than $156K today. This is equal to a normalized return of 1,470%. The company has simply been a star.

Increasing Enghouse’s attractiveness, it is also one of the few tech-listed Canadian Dividend Aristocrats. After raising the dividend by 23% at the start of the pandemic, Enghouse will exit 2020 with an industry-leading 14-year dividend growth streak.

After a slight dip in 2020, analysts’ expect the company to grow revenue by 16% over the next year and all five analysts rate the company a ‘buy’. They have a one-year price target of $83.00 which implies ~17% upside from today’s price.

Enghouse is uniquely positioned as a growth and income stock, a rarity in the tech industry.

Although the company trades at expensive valuations – it always has and given its strong performance, is deserving of a premium.

5 year performance of Enghouse vs TSX

Market Cap: $3.54 billion
Forward P/E: 35.36
Price to Sales: 7.19
5 Year PEG: 2.14
Sales estimates for next year: Premium Members Only
Earnings estimates for next year: Premium Members Only
14 Day RSI: Premium Members Only

Shopify (TSE:SHOP)

What more can be said about Shopify (TSE:SHOP) that hasn’t already been said.

It has been among our top tech stocks for years and is likely to go down as one of the (if not THE) most successful IPO’s this country has ever seen.

Since it went public in 2015, the company has returned 4,260%! A $10,000 investment in the company would be worth $435K today.

We’ve mentioned the TSX30 a couple of times already. Can you guess which stock has topped the list?

Of course you can – Shopify is #1 with returns of 1,043% over the past three years – more than double the second-best performing company.

The pandemic has accelerated the adoption of e-commerce which has benefited Shopify in a big way.

Earlier in the pandemic, Shopify announced that it was generating Black Friday level sales on its platform.

In each of the past two quarters, the company has more than doubled gross merchant volumes YOY and revenue has also grown at a torrid pace.

It has also allowed them to turn a profit, a notable achievement for a company that has not yet been able to generate positive earnings consistently.

Although recent price activity has been choppy, Shopify’s stock price is still up by 163% year to date. Once again, this places the company among the best performing stocks on the TSX Index.

If you are worried you missed out, consider jumping into the stock when it consolidates or when it drops by 20% or more.

The stock does have a history of being quite volatile, and these types of moves happen at least a few times a year. Each time it has proven to be a buying opportunity. Interested in a little more stability rather than growth? Check out the top Canadian telecoms stocks.

5 year performance of Shopify vs TSX

Market Cap: $146.92 billion
Forward P/E: N/A
Price to Sales: 59.80
5 Year PEG: N/A
Sales estimates for next year: Premium Members Only
Earnings estimates for next year: Premium Members Only
14 Day RSI: Premium Members Only

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Mathieu Litalien

Mathieu is an individual investor and has been investing part-time for the better part of the past 20 years. He is primarily interested in fundamental analysis, focusing on the long-term and his portfolio is composed primarily of dividend-paying equities. Mathieu has a moderate risk profile and also looks for growth and value. His passion for finance and the markets have led him to his MBA and writing for Seeking Alpha, Motley Fool and Stocktrades. Mathieu also focuses primarily on stock research and content production for Stocktrades.ca Premium and the Stocktrades blog.

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