The shares of U.S. tech giants posted big gains on Friday after Amazon, Alphabet, and Microsoft released financial results that handily beat analysts' estimates.
By the close, Amazon stock had roared through the $1,100 level (figures in U.S. currency), gaining more than $128 on the day, or 13.2 per cent. Alphabet, the parent company of Google, was ahead $42.25 to finish at $1,033.67. Microsoft added more than $5 (6.4 per cent) to finish at $83.81.
Canadians could only watch with envy. Our own high-tech market is pitifully small compared to that of the U.S. The Information Technology sector comprises only 2.82 per cent of the S&P/TSX Composite Index and there are only 18 companies in the S&P/TSX Capped Info Technology sub-index. It has had a good run this year, up 18.2 per cent to Oct. 27, well ahead of the TSX overall. But there are no real superstars on it. BlackBerry is a shadow of its former self and the new up-and-comer, Shopify, took a beating when a notorious U.S. short seller attacked it. It has recovered somewhat but it still trading at more than $14 below its mid-September high.
That said, there are some companies on our limited high-tech list that are worth considering. They're not glamorous but they are solid and profitable and would be a good fit for anyone wanting to add a Canadian technology firm to a portfolio.
One of them is Descartes Systems Group Inc. (DSG-T, DSGX-Q), based in Waterloo, Ont. Here are the details.
Background: Descartes specializes in business software designed to facilitate logistics, financial controls, inventory, customs clearance, and freight tracking. Customers include transportation firms, manufacturers, distributors, retailers, customs brokers, and government agencies.
Performance: The stock has been gradually moving higher this year, starting off at about $28 a share in January and closing on Friday in Toronto at $37.83. The Nasdaq price is $29.45 (U.S.). These levels represent an all-time high for the stock.
Recent developments: As far as tech firms go, this is a mature business. Revenue growth is slow but steady – second quarter sales (to July 31) were $57.3-million (the company reports in U.S. dollars), up 13.5 per cent from the same period in 2016. Net earnings were $7.2-million (9 cents per share, fully diluted) compared to $5.8-million (8 cents per share) the year before.
The company's balance sheet is sound. As of July 31, it had $87.5-million in cash, up from $38.1 million on Jan. 31. Long-term debt was $40 million.
The company is growing both organically and through acquisitions. During the May-August period it made three deals for U.S.-based companies. They included ShipRush, a provider of e-commerce parcel shipping solutions for small-to medium-sized businesses; PCSTrac, Inc., which helps specialty retailers and their logistics service providers on shipments from distribution centers to stores; and MacroPoint, an electronic transportation network providing location-based truck tracking and predictive freight capacity data content.
Dividend: None.
Risks: The stock is expensive. Not only is it at an all-time high but the p/e ratio is in the stratosphere at 89.8 (trailing 12 months). That high p/e suggests the stock is best suited for aggressive investors who are willing to accept an above-average level of risk.
Summary: The stock is a Buy for aggressive investors seeking capital gains in the information technology sector. Ask your broker if it is suitable for your account.
Disclosure: I do not own shares in this security.
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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
Gordon Pape