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On today’s TSX Breakouts report, there are 35 stocks on the positive breakouts list (stocks with positive price momentum), and 10 securities are on the negative breakouts list (stocks with negative price momentum).

Year-to-date, the top performing sector in the S&P/TSX composite index is the technology sector, reporting a gain of 54 per cent, compared to a 18 per cent return for the TSX Index.

Discussed today is a technology stock that appeared on the positive breakouts list last week with the share price closing at a record high. The stock has delivered robust returns to long-term investors with any price weakness representing a buying opportunity.

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In early November, the company reported solid quarterly earnings results, which led to eight analysts revising their target prices higher.

For fiscal 2019, the company’s reported ROE (return on equity) was 18.5 per cent, and ROIC (return on invested capital) was 15.1 per cent. However, the stock is not cheap and several analysts believe the stock is fairly valued at current levels. A potential catalyst for the stock is a large acquisition announcement. The security highlighted today is CGI Inc. (GIB-A-T).

A brief outline is provided below that may serve as a springboard for further fundamental research.

The company

Montreal-based CGI is a leading, global independent information technology and business consulting services firm. The company provides consulting services, technological systems and solutions, and technology servicing outsourced from its clients. The majority, 33 per cent, of CGI’s revenue is from government agencies.

In terms of geographical revenue breakdown, in fiscal 2019, 29 per cent was from the U.S., 16 per cent of revenue was from Canada, 15 per cent was from France, 12 per cent from the U.K., 7 per cent from Sweden, 6 per cent from Finland, and 15 per cent was from the rest of the world.

Before the market opened on Nov. 6, the company reported solid fourth-quarter financial results (the company’s fiscal year-end is Sept. 30) that lifted the share price 2.6 per cent that day.

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Revenue climbed to $2.96-billion, up 5.7 per cent year-over-year. Organic, or internal, growth was 4 per cent. Adjusted EBIT (earnings before interest and taxes) came in at $457.5-million. The adjusted EBIT margin was 15.5 per cent. Adjusted earnings per share was $1.21, matching the consensus estimate. Bookings were strong at $12.6-billion with an impressive high book-to-bill ratio of 1.15 times.

There was weakness in the U.K. market due to the ongoing Brexit uncertainty. This region posted a book-to-bill ratio of less than 1 times, which management anticipates will improve in 2020. Backlog was $22.6-billion, up sequentially from $22.4-billion reported last quarter. For fiscal 2019, return on equity was 18.5 per cent, up from 17.3 per cent realized in fiscal 2018. Return on invested capital was 15.1 per cent, up from 14.5 per cent reported last year.

On the earnings call, management reiterated its commitment to its “Build and Buy” strategy. Management targets doubling the size of the company within five to seven years.

Responding to a question relating to large acquisition opportunities, president and chief executive officer George Schindler said: “We’re certainly not through on the metro market merger strategy. There’s lots of continued opportunities there. But to your direct question on the transformational opportunities, I think, again, that we haven’t seen it yet on the larger transformational opportunities on valuation. But I actually believe that we’ll see more attractive valuations as the market continues to shift and slow in different geographies, most pronounced right now in Europe.”

The company has a healthy balance sheet to fund acquisitions.

The company’s shares are dual-listed, trading on Toronto Stock Exchange under the ticker GIB-A and on the New York Stock Exchange with the ticker GIB.

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Returning capital to shareholders

Management is focused on growth and as a result, currently does not pay its shareholders a dividend.

The company has been actively repurchasing shares as part of its share buyback program. During fiscal 2019, the company repurchased 12,460,232 shares at a weighted average price of $90.37.

Analysts’ recommendations

The stock is well covered.

Since the company released its fourth-quarter financial results, 17 analysts that have issued reports, of which nine analysts have buy recommendations, six analysts have neutral recommendations, and two analysts have “sell” recommendations on the stock (Derric Macron of Société Générale and Morningstar’s Andrew Lange).

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The firms providing recent research coverage on the company are: Accountability Research, BMO Nesbitt Burns, Canaccord Genuity, CIBC World Markets, Desjardins Securities, Eight Capital, GMP, Morningstar, National Bank Financial, PI Financial, Raymond James, RBC Dominion Securities, Scotiabank, Société Générale, TD Securities, Veritas Investment Research, and Wells Fargo Securities.

Revised recommendations

This month, after the company reported its quarterly earnings results, eight analysts raised their targets

  • BMO’s Thanos Moschopoulos to $117 from $115;
  • PI Financial’s Gus Papageorgiou by $5 to $111;
  • Raymond James’ Steven Li to $114 from $110;
  • TD Securities’ Daniel Chan to $120 from $115;
  • Wells Fargo’s Edward Caso Jr. to $108 from $105;
  • Accountability Research’s Harriet Li by $11 to $113;
  • Veritas’ Howard Leung to $110 from $105.
  • Société Générale’s Derric Marcon by $1 to $87.

Financial forecasts

The Street is forecasting earnings per share of $5.18 in fiscal 2020, up 10 per cent from $4.70 reported in fiscal 2019, with earnings expected to rise to $5.60 in fiscal 2021.

Valuation

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On a valuation basis, the stock is not cheap.

According to Bloomberg, the stock trades at a price-to-earnings multiple of 20.9 times the fiscal 2020 consensus estimate, above its three-year historical average of 18.6 times, but below its peak multiple of 22.6 times. On an enterprise value-to-EBITDA (earnings before interest, taxes, depreciation and amortization) basis, the stock is trading at 13.3 times the fiscal 2020 consensus estimate, above the three-year historical average of 11.4 times.

The average one-year target price is $109.56, suggesting the share price is nearly fully valued. However, target prices range widely. Individual target prices are as follows in numerical order: $82 (from Mornigstar’s Andrew Lange), $87, three at $106, $108, two at $110, $111, $113, $114, $115, $116, $117, three at $120 (from National Bank’s Richard Tse, TD’s Daniel Chan and Desjardins’ Maher Yaghi).

Insider transaction activity

Month-to-date, three insiders have reported trades in the public market – all sales.

Between Nov. 11 and Nov. 18, Leena-Mari Lähteenmaa, president of Finland, Poland and the Baltics, exercised her options, receiving 9,912 shares at an average cost per share of approximately $43.85, and sold 9,912 shares at an average price per share of roughly $106.84, eliminating her portfolio’s position. Net proceeds, not including trading fees, totaled over $624,000.

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On Nov. 13, founder and the executive chairman Serge Godin exercised his rights, receiving 135,429 shares, and sold 72,198 shares at a price per share of $105.581, leaving 63,231 shares in his personal account. In a separate account where he has indirect ownership (Godin Family Foundation), he sold 85,000 shares at an average price per share of approximately $105.58 with 84,600 shares remaining in this account.

On Nov. 12, Gilles Labbé, who sits on the board of directors, exercised his options, receiving 7,292 shares at an average cost per share of approximately $15.18, and sold 7,292 shares at an average price per share of roughly $105.81, eliminating his account’s holdings. Net proceeds, excluding commission charges, exceeded $660,000.

Chart watch

The stock has been a strong long-term performer with any price weakness representing a buying opportunity. The share price closed at a record high of $109.46 on Tues. Nov. 19. Year-to-date, the share price is up 30 per cent. Looking back, in 2018, 2017, 2016, 2015, 2014 and 2013, the stock price rallied 22 per cent, 6 per cent, and 16 per cent, 25 per cent, 25 per cent, and 55 per cent, respectively.

In addition, the stock has provided investors with downside protection during periods of market weakness. For instance, between Oct. 1, 2018 and Dec. 24, 2018, the S&P/TSX composite index collapsed 14 per cent, while CGI’s stock price retreated just 4 per cent.

Looking at key resistance and support levels for CGI, the stock price is approaching an initial ceiling of resistance around $110, and after that there is overhead resistance around $120. There is strong downside technical support around $100, near its 200-day moving average (at $98.94).

The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.

If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.

Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.

A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.

Positive BreakokutsNov. 22 close
ABT-TAbsolute Software Corp $8.52
AD-TAlaris Royalty Corp $22.10
ACQ-TAutoCanada Inc $13.71
BEP-UN-TBrookfield Renewable Energy Partners LP $60.98
BTB-UN-TBTB Real Estate Investment Trust $4.98
CWB-TCanadian Western Bank $35.89
CWX-TCanWel Building Materials Group Ltd. $5.41
CPX-TCapital Power Corp $32.78
CM-TCIBC $115.46
CSU-TConstellation Software Inc $1,400.03
EFN-TElement Fleet Management Corp. $11.61
ENGH-TEnghouse Systems Ltd $41.40
GSY-Tgoeasy Ltd $65.29
GCG-A-TGuardian Capital Group Ltd $27.51
HDI-THardwoods Distribution Inc $15.92
IPCO-TInternational Petroleum Corp. of Sweden $5.78
JE-TJust Energy Group Inc $3.42
KEL-TKelt Exploration Ltd $3.81
KXS-TKinaxis Inc $106.17
MEQ-TMainstreet Equity Corp $68.70
MKP-TMCAN Mortgage Corp $16.87
NA-TNational Bank of Canada $70.69
NWH-UN-TNorthWest Healthcare Properties REIT $12.32
NVO-TNovo Resources Corp. $3.16
PLC-TPark Lawn Corp. $29.96
PTS-TPoints International Ltd $16.27
REAL-TReal Matters $12.19
RPI-UN-TRichards Packaging Income Fund $45.10
RY-TRoyal Bank of Canada $109.25
RUS-TRussel Metals Inc $23.14
TFII-TTFI International Inc. $43.82
TSGI-TThe Stars Group Inc. $31.57
TRZ-TTransat AT Inc $16.08
TCN-TTricon Capital Group Inc $11.03
TSU-TTrisura Group Ltd. $38.96
Negative Breakouts
ADW-A-TAndrew Peller Ltd $11.90
BPF-UN-TBoston Pizza Royalties Income Fund $14.32
CKI-TClarke Inc $12.30
FEC-TFrontera Energy Corp. $9.44
HR-UN-TH&R Real Estate Investment Trust $21.22
HBM-THudBay Minerals Inc $4.29
LGO-TLargo Resources Ltd. $0.91
RSI-TRogers Sugar Inc $4.65
TH-TTheratechnologies Inc $4.09
TCL-A-TTranscontinental Inc $14.53

Source: Bloomberg

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