When it comes to recovery on the markets, few areas have posted as robust a rebound as the technology sector. Which leads to a rather obvious question: Is it too late for investors to jump in?
After all, it can be dangerous to get into a sector after it bounces some 50 per cent off its lows. Or at least, those were the old rules – rules that were written before one of the most spectacular market crashes in history.
The tech index on the S&P/TSX is up a resounding 36 per cent since the beginning of the year, and an even more impressive 52 per cent from its March 9 lows. With a gain of 37 per cent, only the financial services sector is up more in 2009.
“You're not supposed to jump in after such a run, but counteracting that is the fact that we are not in the late stages of an economic cycle,” said Duncan Stewart, director of research and analysis at DSAM Consulting. “If we are indeed in a recovery, it's still early. And technology tends to do well early in a recovery – always has, and probably always will.”
Any reference to the “tech sector” on the S&P/TSX is somewhat misleading; in Canada, any such mention is basically a veiled reference to Research In Motion . The sector is comprised of only five companies (the others are Celestica CLS-T , MacDonald Dettwiler & Associates MDA-T , CGI Group GIB.A-T and Open Text OTC-T ), and at 3.5 per cent, RIM is the only one carrying enough weight to actually move the index. And it's up about 65 per cent this year.
But those obviously aren't the only companies investors have to choose from. There are dozens of smaller-capitalization tech firms that have quietly developed their products and are ready to take advantage of a return to economic health – National Bank Financial analyst Kris Thompson quickly rattles off Bridgewater Systems, DragonWave and RedKnee as examples.
“Wireless broadband is one area that is posting above-average revenue growth,” he says.
And with tech companies, focusing on a niche is key. Plenty of tech companies went bust at the height of the tech boom because they were selling hardware nobody wanted or software that was out of touch with the times.
There are also significant challenges facing Canadian technology companies. The strong loonie is foremost, since most consider the United States their primary market and make their sales in U.S. dollars. And to justify charging customers more to make up the difference, they'll have to make better products – which means more costly research and development.
“They will need to reinvest in their main asset – people,” Mr. Thompson says. “We expect hiring to recommence over the coming quarters, which will exert earnings drag over the near term until new revenues cover the additional head count.”
But after learning tough lessons in the last downturn – most tech companies recovered at a slower rate than the rest of the market because they had to unload warehouses full of expensive equipment that was shunned through the recession – Mr. Stewart says the industry is poised to lead any recovery, however distant or tepid.
“If one believes we have put the worst of the recession behind us, then tech is probably an excellent place to be,” Mr. Stewart says.
