Where should investors look next for returns? Canadian tech stocks

Canadian tech companies are polite and reasonable, but their stock returns are nothing to be modest about. And according to one firm, Canada’s tech sector is on the verge of exponential growth.

Where? Canada. When? Now.

Tech companies are reaching escape velocity — which could set them for decades of growth. Based on research from Donville Kent Asset Management (DKAM), a top-performing Canadian fund:

• There’s no better time to be investing in the tech sector.
• The rotation into value stocks is only temporary.

While the success of the tech sector isn’t new, much of the focus has been on American companies. However, Canada is seeing explosive growth — raising record amounts of capital in recent years. This is partly due to its growing tech talent pool:

• Canada’s education system, immigration policies and lower salary costs make hiring easier and cheaper.
• Toronto ranks third in the number of tech employees — right behind San Francisco and New York.

More public tech companies are available to Canadian investors as more choose to go public — compared to being acquired by US companies in the past.

How? Under-followed, high potential B2B companies

Why tech? According to a Morgan Stanley CIO survey, 23% of today’s workloads are running in the cloud — indicating we’re still in the early stages of cloud adoption.

DCAM favors companies with the following qualities:

• Market cap between $100m to $4b.
• Business-to-business (B2B) companies — which sell products to other businesses.
• Reinvesting for growth vs. paying back investors with dividends/stock buybacks.

DKAM focuses on small, under-followed companies that are past the concept stage — producing real sales and earnings. But once they grow beyond that and are fully priced by the market, little upside remains.

Investors: High growth-to-value companies

DKAM provided a list of Canadian software companies ranked by their growth-to-value (GTV) score — a way to find high growth without overpaying:

• Dye & Durham (TSX:DND) — a legal software provider [GTV score 4.0].
• Telus International (TSX:TIXT) — customer experience and IT solutions software provider [3.2].
• Others on the list: Nuvei (TSX:NVEI), Topicus (TSX:TOI), Sangoma (TSX:STC), Constellation Software (TSX:CSU).

Some of the smallest Canadian tech companies followed by DKAM are Plurilock (CVE:PLUR), NowVertical (CVE:NOW).

Another trend: More and more Canadian tech companies (i.e. Shopify and Lightspeed) are double listed on the Canadian and US stock exchanges — Nuvei is also expected to list on the NASDAQ.