Comments on Calian in Saturday's National Post.
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Bargains among smaller techs
Robert McWhirter left Royal Bank to run Triax fund
Sonita Horvitch
Financial Post
To find value in Canadian technology stocks, investors need to be extremely selective among the big-cap tech names and look carefully at the smaller-cap stocks, says Robert McWhirter, vice-president and portfolio manager at Toronto-based Triax Investment Management Inc.
"The small-cap Canadian tech stocks appear to be better priced at this stage," he says.
A technology specialist, McWhirter recently left Royal Bank Investment Management Inc. to start a Canadian high-technology growth mutual fund at Triax, as well as manage funds for high net worth individuals.
Canadian hardware stocks have continued to outperform the Toronto Stock Exchange 300 year to date, he notes. From the beginning of the year to the end of August, the 19-stock TSE hardware subindex was up 64% while the 15-stock software subindex declined 8% and the TSE 300 composite index added 34%.
In the column of June 24, McWhirter said "the key determinant for the outlook for the tech sector is whether U.S. interest rates continue to rise."
Since then, the yield on 10-year U.S. bonds has declined almost 50 basis points; this helped the TSE hardware index to add 24% from June 24 to the end of August and the software index to rise 4%. During the same period, the TSE 300 added 11% and the Nasdaq composite index was up 9%.
McWhirter uses both quantitative and traditional fundamental analysis. His principal investment approach is to compare relative earnings growth prospects with relative values.
This manager notes that relative to the median stock in the TSE 300, the median stock of the 34 TSE 300 technology stocks "appears expensive" based on earnings estimates for both 2000 and 2001. His assessment is based on the calculation of a PEG ratio --the price-earnings multiple of a stock divided by its expected earnings growth rate.
For 2000, he calculates that the PEG on the median TSE tech stock is 1.9, which means that the P/E of the average tech stock is almost twice the expected 2000 EPS growth rate. By contrast, the PEG for the median stock in TSE 300 for 2000 is 0.85. For 2001, the PEG for the median tech stock is 1.2 versus 0.82 for the median stock in the TSE 300.
Further analysis shows, he says, that smaller-cap Canadian stocks "appear to offer better relative value." For the column, he has chosen:
- Calian Technology Ltd. (CTY/TSE), which closed recently at $6.95 and trades in a 52-week range of $9.95 to $3.90. Based in Kanata, Ont., this company provides information technology services. "Its e-learning activities represent a fast-growing aspect of its business," says McWhirter.
His earnings per share estimate is 79¢ for the fiscal year to September, 2001, and $1 for fiscal 2002. The PEG ratio is 0.2 for both years.
As a turnaround situation, he likes:
- Com Dev International Ltd. (CDV/TSE) $11 ($13.35-$2.40). Based in Cambridge, Ont., this company designs and makes space and ground-based wireless communications products through its two divisions: space and wireless. The company has been restructuring over the past 18 months, he says, and has been winning some major contracts.
His earnings per share estimates are 40¢ for the year to October, 2001, and 50¢ for tfiscal 2002. The PEG ratio is 0.1 and 0.8 for fiscal 2001 and 2002, respectively.
As another turnaround situation, he likes:
- Wescam Inc. (WSC/TSE) $6.95 ($7.60-$3.81). Based in Flamborough, Ont., the firm designs and manufactures a line of stabilized camera and image capture systems. Investors beat down this stock after the company incurred large writedowns in fiscal 1997. Since then, the company has refocused its activities, says McWhirter. His EPS estimates are 67¢ for the year to October, 2001, and 90¢ for fiscal 2002. Here the PEG ratios are 0.3 for fiscal 2001 and 0.2 for fiscal 2002.
His larger-cap pick is:
- Mosaid Technologies Inc. (MSD/TSE) $56 ($67.50-$10). Based in Kanata, Ont., this company designs advanced memory chips and tests systems for memory chips and licenses its technology. McWhirter notes that the semiconductor industry has "rebounded dramatically" and this has boosted Mosaid's earnings. Also, Mosaid has been "successful in encouraging other semiconductor makers to pay royalties for use of its patents."
Analysts are revising estimates upwards, he notes. The EPS estimate is currently 60¢ for the fiscal year to April, 2001, and 90¢ for fiscal 2002. The PEG ratio is 0.8 for fiscal 2001 and 1.3 for fiscal 2002. "While the 1.3 PEG ratio appears high, "the company is expected to continue to secure additional royalty payments."
McWhirter continues to champion C-MAC Industries Inc. (CMS/TSE) $96 ($112.80-$17.25), which makes electronic systems. He selected this stock in the column of March 25 when it traded at $73.25. "C-MAC has PEG ratios of 0.6 and 1.0 for the years ended 2000 and 2001 respectively."
He also continues to favour CAE Inc. (CAE/TSE) $19.45 ($20-$7.30), which designs and makes commercial and military flight simulators. This was a pick in the same column at $13.55. "CAE has PEG ratios of 0.6 and 0.7 for the years ended March, 2001, and 2002 respectively."
Analysts have increased their EPS estimates on both C-MAC and CAE, says McWhirter.
His "avoid" is electronic document company Xenos Group Inc. (XNS/TSE) $4.77 ($50.25-$4.30). The company needs to expand its service. "It is able to convert traditional paper invoices to the Web, but it needs to go a step further and help with customer relationship management."
shorvitch@nationalpost.com; Triax Investment Management Inc. may hold positions in the securities mentioned.
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