Tech stocks are killing it in Canada
Canadian technology stocks are trading at a near decade-high
Canadian technology stocks are trading at near a decade-high as they ride booming U.S. demand for everything from e-commerce to office software and stay far from the global trade fray.
The S&P/TSX Composite's technology index has gained about 23 per cent this year, trouncing the 6.1 per cent rise of its nearest competitor, industrials.
Tech now sports a 4 per cent weighting in the benchmark equity index, the highest since 4.2 per cent in 2009 when BlackBerry ruled the smartphone market.
"I don't see why this trend would stop," Todd Coupland, an analyst at CIBC World Markets, said in an interview. "Those businesses are growing faster than the average company and it's attracting investment. Whether it's ecommerce or social or enterprise cloud, those are all very well-established trends and look to have significant possibilities."
E-commerce company Shopify Inc. is leading the charge with a 62 per cent advance this year, followed by Mitel Networks, the takeover target of a U.K. private equity firm. Constellation Software's share price crossed $1,000 in May as it continues its acquisition streak and cloud-services company Kinaxis Inc. is up 17 per cent in 2018.
While Shopify's ninefold surge from its 2015 initial public offering hogs headlines, CGI Group's steady climb to record highs has given the 42-year-old services provider a market value of $23.9 billion and the biggest weighting in the index at 23 per cent.
BlackBerry made up 84 per cent of the index in 2009 but takes only 7.3 per cent now. Still, the index only has 11members compared with a 49-member energy index, so it has done little to boost the benchmark, which is flat on the year.
Brian Belski, chief investment strategist at BMO Capital Markets, said companies with high foreign-revenue exposure have been outperforming domestically-focused companies and that means tech and industrials.
"We believe the passage of U.S. tax reform and the associated surge in U.S. growth are likely the main drivers," Belski wrote in a note earlier this month. Outperformance should continue as long as the U.S. leads global growth, despite ongoing concerns about the North American Free Trade Agreement, he said.
More than half the companies in the tech index get over 40 per cent of their revenues from the U.S., including Shopify with 71 per cent, Kinaxis at 94 per cent and Constellation Software at 50 per cent, according to data compiled by Bloomberg. And the tech sector has escaped the tariffs that the U.S. has slapped on Canadian steel or aluminum.
Mark Schmehl, a portfolio manager at Fidelity Canada Asset Management, is skeptical these companies will continue to soar.
"When I think about technology, I think of innovative companies doing new things," he said. "Shopify qualifies, but it is the only public Canadian company that I can really think of that does this at any size."
Schmehl is more excited about the private tech space where venture-capital investment ballooned 11 per cent to $3.5 billion in 2017, according to a report by the Canadian Venture Capital and Private Equity Association and U.S. companies including Alphabet Inc.'s Google and Amazon.com Inc. are expanding in Canada.
There's been few initial public offerings of any Canadian-based companies in the tech sector in recent years. Real Matters had a $157 million offering in April 2017.