Stock Market: CanTech Companies May Be Small, But They’re Making Big Profits for Investors

The S&P 500 closed above 5,000 for the first time in history on Feb. 9.

The driving force was – no surprise – technology, specifically the so-called “Magnificent Seven” that includes Apple, Amazon, Alphabet, Microsoft, Meta Platforms, Nvidia, and Tesla. During the year to Feb. 9, the S&P 500 Information Technology Index gained 52 per cent. This year alone it’s ahead by 10.2 per cent.

Realistically, we should be calling this group the Magnificent Six. Tesla shouldn’t make the cut. The stock is currently trading at about the same level as a year ago while the rest have posted strong gains. But six sounds much less grandiose, so we’re stuck with seven until someone coins a new term. That will probably happen soon; it wasn’t long ago that these stocks went by the acronym FAANG+. 

Canada doesn’t have a Magnificent Seven. We don’t even have a Magnificent One. Ottawa-based Shopify has a market cap of US$112 billion. That makes it a flea compared to the Magnificent Seven, which have market caps ranging from US$616 billion (Tesla) to US$3 trillion (Microsoft). 

But, although we’re small by comparison, Canada’s information technology sector is performing well. Over the past year, the S&P/TSX Capped Information Technology Index has gained 44 per cent. Year-to-date it’s up 10.3 per cent.

Shopify (SHOP-T) is obviously one of the leaders, with a year-to-date gain of 18.37 per cent after more than doubling in price in 2023. We first recommended it in my Internet Wealth Builder newsletter in February 2018 at a split-adjusted price of $2.83. It closed on Feb. 9 at $122.11.

Other players that are worth looking it include Celestica (CLS-T), which led the TSX advancers last year with a gain of 154 per cent. It’s still hot, up 34 per cent so far in 2024. 

Toronto-based, Celestica has a market cap of $6.2 billion. The company, a spin-off from IBM, provides hardware and supply chain solutions to some of the world’s largest businesses. 

On Jan. 29, the company released fourth quarter and year-end results that were better than expected. Revenue for the quarter was $2.14 billion, up five per cent compared to last year. Earnings per share (EPS) was $0.70, up from $0.35 in the same quarter of 2022. Adjusted EPS was $0.76.

For the full year, revenue was $7.96 billion compared to $7.25 billion in 2022. EPS was $2.03, up from $1.18 in the prior year.

“The strong momentum we had in 2023 is continuing into 2024 and we remain confident in our long-term strategy,” said CEO Rob Mionis. The company is forecasting first quarter revenue of $2.025-$2.175 million and adjusted EPS of $0.67-$0.77. 

We recommended Celestica in November last year at $38.46. The stock closed Feb. 9 at $52.02, so we have a gain of 35 per cent in three months. We continue to rate it as a Buy.

Another high-performance Canadian tech company is Constellation Software (CSU-T). It was up 55 per cent in 2023 and has added another 13.6 per cent so far this year.

Constellation is a large tech company by Canadian standards with a market cap of about $79 billion. It was founded in 1995 to assemble a portfolio of vertical market software companies that had the potential to be leaders in their particular area of expertise. The company has grown rapidly through a combination of acquisitions and organic growth and continues to apply the same formula.

Year-end results won’t be released until early March, but third quarter figures showed growth isn’t slowing. The Toronto-based company reported revenue of $2.1 billion, up 23 per cent from $1.7 billion in the third quarter of 2022. Note that the company reports in U.S. dollars. 

Net income attributable to common shareholders increased 30 per cent to $177 million ($8.36 on a diluted share basis) from $136 million ($6.42 per share) in 2022. The company completed several acquisitions in the quarter for a total cost of $187 million. 

For the first nine months of 2023 total revenue was $6.1 billion, an increase of 27 per cent compared to $4.8 billion for the comparable period in 2022. The company said the increase was primarily due to growth from acquisitions. 

The stock pays a quarterly dividend of US$1. Given the high share price, the yield is negligible. The stock closed Friday at $3,732.08. 

Other profitable Canadian tech stocks we have recommended are CGI Group (GIB.A-T), which is up 8.4 per cent this year, and Descartes Systems (DSG-T), which is ahead 8.2 per cent.

Bottom line: The Magnificent Seven may get all the attention but CanTech offers strong profit potential as well. 

Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca. 

Follow Gordon Pape on Twitter at twitter.com/GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney 

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