Canada Connection: Technology stocks
Technology is a sector often overlooked in the Canadian small-cap market, which is precisely why small-cap specialists Martin Dufresne and Patrick Potvin, portfolio managers at Montreal-based Fiera YMG Capital Inc., have been steadily boosting their holdings.
"We are finding select stocks that trade at modest valuations relative to the companies' growth prospects," Dufresne said after finishing a recent evaluation of the sector based on what he described as “industry reports by sell side analysts, meetings with managements and internal research.”
Generally, said Potvin, "our strategy is to sell off low growth or disappointing companies and put the proceeds into those companies that we consider have a more promising growth profile."
As a result, according to Potvin, the portfolio managers say they have been reducing holdings of companies that have become large cap and parlaying the proceeds into smaller caps that "generally tend to have higher growth prospects."
Fiera YMG has roughly C$21-billion under management, of which about C$6-billion is in Canadian equities. Dufresne and Potvin manage a number of small-cap Canadian portfolios including the Millennia III North American Small Company fund. This is part of the segregated family of funds managed by Fiera YMG for Desjardins Financial Security.
The Millennia III North American Small Company fund has almost 50% in the U.S. equity market via futures contracts linked to the Russell 2000 Index (NYSE: IWM). The rest is invested in Canadian small caps and managed by Dufresne and Potvin.
The two managers target firms with a market capitalization of C$100-million to C$1-billion when they are bought. Currently, this portfolio has 64 names.
On the sell side in the technology sector, Dufresne and Potvin said they have sold their holding in Mediagrif Interactive Technologies Inc. (TSE: MDF) This Quebec-based company develops and operates various vertical business-to-business based networks including The Broker Forum and Power Source On-Line.
"We were patient with this stock, but have been disappointed in its earnings growth, which has been flat for a number of years and is expected to continue to be lackluster," said Dufresne. Mediagrif currently trades at C$9.50, off its 52-week high of C$11 in early February. It's 52-week low is $8.05, established in August 2006.
On the buying side, the duo looks at what it describes as an "earlier stage" tech company that they believe has excellent growth potential, though it is not yet profitable: Absolute Software Corp. (TSE: ABT)
This Vancouver-based company provides software for tracking and enhancing the security of personal and mobile computers.
Product lines include ComputraceComplete and Absolute-Track. The company has a market capitalization of C$590-million. "Absolute Software's offering is cutting edge," Potvin said, "as the software is embedded in the computer."
The company has been spending money on developing its products and building its client base, according to Potvin, and while it is currently generating cash flow, it has yet to turn a profit.
Absolute Software is expected to report cash flow of C$0.63 per share and a loss of C$0.20 for its fiscal year ended in June 2007. For the fiscal year ending in June 2008, the consensus is for cash flow of C$0.97 per share and a loss of C$0.12 per share.
For the fiscal year ending in June 2009, the company is expected to report cash flow per share of C$1.15 and earnings per share of of C$0.08¢. It current trades at just under C$31, near its 52-week high of C$32.95 earlier this month. Its 52-week low is C$3.40
Another emerging technology stock they like is Zaio Corp.(CVE: ZAO). Based in Calgary, the company has a database of digital photographs and property values on residential real estate in the United States. It has a market capitalization of about C$143 million.
Zaio's database is a resource for a wide range of users -- real estate agents, appraisers, city assessment departments and financial institutions. Zaio (which is an acronym for Zone Appraisal and Imaging Operations) has covered a number of major U.S. cities in Spokane and plans to launch a Canadian project this fall.
Dufresne says Zaio is expected to report a loss of C$0.2 a share in 2007, but turn a profit of C$0.50¢ a share in 2008. It currently trades just under C$4, not far from its 52-week high of C$5.60 in early May. Its 52-week low of C$0.29 was established in August 2006.
And what Canadian investment strategy would be complete without some mining exposure?
On the mining side, the portfolio managers have invested in junior gold mining company Minefinders Corp. Ltd. (TSE: MFL) This Vancouver-based company has a market capitalization of C$640-million.
Minefinders is developing its Dolores gold and silver project in Mexico, which, says Potvin, “is a relatively stable country to conduct mining operations in," and which is expected to be in production by year end.
"Now is our sweet spot to buy this stock," said Dufresne, "as the market will likely increase the valuation when the mine goes into production."
The consensus is calling for Minefinders to produce earnings per share of C$1.39 in 2008 and C$1.57 in 2009. It currently trades at C$12.88, just off its 52-week high of C$14.16 in early May but well above its 52-week low of C$8.36 last October.
