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Beyond Google: six under-the-radar tech stocks

In a market dominated by a half-dozen powerhouse players, portfolio managers offer lesser-known picks worth considering

By: JEFF BUCKSTEIN

Date: November 09, 2017

Global name recognition comes easily to high-tech giants Google Inc., Facebook Inc. and Amazon.com Inc. They dominate media coverage and market activity as investors gravitate to them.

But what about other tech companies — some right here in Canada — that are performing well but perhaps flying a bit under the radar?

We asked two portfolio managers to recommend lesser-known tech stocks worth taking a look at.

Richard Tse, technology analyst, National Bank Financial, Toronto

Kinaxis Inc.: The stock of this Ottawa-based developer of software for supply chain technology has performed strongly in recent years.

A large proportion of its revenue is recurring — more than 20 per cent annually. "That's in the category of higher-growth technology stocks that are awarded premium valuations," says Mr. Tse.

Kinaxis has displaced some of its competitors in recent years and has room for long-term growth from new customers, as well as room for existing customers to expand their applications, he notes.

The company's initial public offering in 2014 was among the most successful technology IPOs in recent history in Canada, he says. It's a leader that's taking share in the supply-chain planning market, building up a roster of large Fortune 1000 customers.

"We see the company having about 100 customers today, but with a much larger market opportunity of potentially around 2,000 customers."

Sierra Wireless Inc.: Sierra of Richmond, B.C., makes wireless communications gear and software used in cellular networks and machine-to-machine communications.

It's a big player in the "Internet of Things" (IoT) space, which sees the connection and digitization of all manner of objects. "We believe IoT will probably accelerate in terms of the number of connected devices over the next three to five years, and Sierra Wireless will be a beneficiary of that," Mr. Tse says.

The company is also well diversified, operating in the automotive, industrials, financial services and transportation sectors, he says. "So it's very broad, and we think that the global trends in terms of more connected devices will benefit Sierra Wireless. They're basically going to be riding that wave," he predicts.

Sierra is in the process of closing a recently announced deal for the acquisition of Numerex Corp., an Atlanta-based IoT competitor, a deal that Mr. Tse believes will provide additional recurring revenue. "From a financial perspective, we think Sierra’s stock is attractively valued."

Altus Group Ltd.: Toronto-based Altus, which has roots in commercial real estate consulting, is successfully pivoting toward providing technology, including analytical software data-advisory services.

"They have internally developed and acquired different technologies that they're selling into their existing customer base," Mr. Tse says. "We think that is providing many value drivers, from recurring revenue to helping expand their operating margins. And I think the runway is long for them to continue to increase the proportion of revenue coming from technology."

Financial growth has been solid. "In fiscal 2017, we see revenue growing more than 20 per cent, and earnings before interest, taxes, depreciation and amortization [EBITDA] growing more than 20 per cent over fiscal 2016.

It's not out of reach that this company could be producing mid-20-per-cent EBITDA margins in the next three to five years. Those are strong prospects."

Tyler Hewlett, vice-president and portfolio manager, BMO Asset Management Inc., Toronto

Descartes Systems Group Inc.: This software company helps transportation companies manage and automate shipping.

"They run one of the largest global logistics networks in the world," says Mr. Hewlett. "Over 90 per cent of their business is outside of Canada." Major customers include Home Depot Inc., Coca-Cola Co. and British Airways PLC.

Mr. Hewlett is also bullish on Descartes' financial performance, noting that more than 97 per cent of its revenue is recurring. "It's a rare company that has been able to compound their EBITDA growth per share by 20 per cent between 2007 and 2017 through a mix of acquisitions and organic, internal growth. Investors have really been able to benefit," he says.

As Descartes is not a capital-intensive business, it has a strong free cash flow, Mr. Hewlett says. "We don't see any reason why Descartes can't keep growing at the rates it has over the past few years."

Solium Capital Inc.: Calgary-based Solium is a fintech company that provides software and services for equity plan management, including share-based compensation for public and private companies. Solium’s clients include international giants Morgan Stanley and UBS AG as well as large Canadian financial institutions.

The company is expected to continue adding global customers, says Mr. Hewlett. It has a lot of free cash flow as well as heavy insider ownership, which usually indicates management is acting in the best interests of shareholders.

Solium has also increased its revenue by more than 10 per cent annually over the past five years. Mr. Hewlett expects that growth to accelerate now that it has landed Morgan Stanley and UBS as customers. "We think the best days for revenue growth for this company are ahead of it."

Real Matters Inc.: This Markham, Ont.-based firm, which completed an IPO this past spring, provides network management services for the mortgage lending and insurance sectors.

Mr. Hewlett notes that the company created a more efficient system for home appraisals for which it was able to sign up several major Canadian banks. After demonstrating success, it also signed top-tier banks in the United States.

"They're well positioned to keep taking market share. As the company rolls out their large customers, earnings growth should be very high, and margins should increase substantially, and the stock should do very well under this scenario," Mr. Hewlett predicts.

Securing a larger market share for home appraisals in the United States, and branching into servicing other markets, such as title searching, "should continue to drive this company's revenue and earnings for many years," he adds.

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