April 14, 1999
Oh, Canada… Dot-Com
By Paul R. La Monica
THERE'S A new national
pastime in Canada: investing in
Internet stocks.
Sure, hockey is still very big in
the Great White North. But with
Wayne Gretzky rumored to be
retiring this week, that sport
won't be the same. Canadian
Internet stocks on the other hand
are roaring along like a blistering
Al MacInnis slap shot from the
blue line. For those of you who
don't follow hockey, that's a lot of
momentum.
If you thought investors in the
U.S. were going crazy over
Web-related stocks, check this
out: The most actively traded
stock on the Toronto Stock
Exchange on Tuesday was American Gem, a penny mining stock. Its stock
rose 13.65% as 7.36 million shares traded hands. Why such interest?
American Gem announced on Monday that it was buying a brokerage firm
with the intention of developing an online trading business. Other nearly
worthless mining stocks have also soared on hopes that they too will trade
silver and gold for silicon. Now that's Internet insanity, eh?
Don't get the wrong impression about Canadian Internet stocks. There are
actually quite a few legitimate Canadian Internet plays and we devoted
today's screen to looking at some of the more interesting ones.
The most well known Canadian Internet stocks are Bid.com and Toronto
Dominion (TD). Bid.com, an online auctioneer that we wrote about in our
eBay wannabes screen last month, is up more than 350% since the
beginning of March. The stock's unbelievable ascent has been fueled by
hopes of an imminent listing on Nasdaq in the U.S. Bid.com applied for a
Nasdaq listing in February. Because of the runup, this stock is obviously
not as attractive as it once was, but keep in mind that you could have said
the same thing this time last year about Amazon.com (AMZN) or America
Online (AOL). So the stock could still be worth a look, especially if it does
get approval to trade on Nasdaq.
Toronto Dominion has soared more than 65% this year on the heels of the
craze for online brokerages. Toronto Dominion owns online brokerage
Waterhouse Securities and announced that it would spin off 10% of the
company last month. As a result, Toronto Dominion is now by far the most
expensive of the Canadian bank stocks. But when you look at how Schwab
(SCH), E*Trade (EGRP) and Ameritrade (AMTD) have done the last few
months as online account growth continues to soar, there's no reason why
Waterhouse shouldn't enjoy similar success.
There are several other potentially hot Internet stocks that you might not
have heard of. First there's online financial services firm Versus
Technologies. Versus has a retail online brokerage, which is of course what
makes it so sexy. And what makes it sexier is that the brokerage Versus
owns is not some no-name online shop. Versus has the license to operate
E*Trade Canada. Adam Adamou, an analyst with Taurus Capital Markets in
Toronto, says the stock, which went public last month and has increased
more than 120% from its offering price, still looks attractive in the long term
because in addition to its retail business, it is one of the largest providers of
electronic trading to the Canadian institutional market.
Microforum is another favorite of Adamou's. The company is an
e-commerce outsourcing firm. Retailers such as Sony's (SNE) Canadian
subsidiary have hired Microforum to design and run their retailing Web sites.
Microforum receives a small portion of sales from the sites it runs. Adamou
says Microforum should eke out a profit in the fourth quarter. And like
Bid.com, it is hoping to list on Nasdaq.
Adamou also likes the Internet prospects of a company called Beamscope.
The company is not an Internet play in and of itself but Beamscope owns
20% of a privately held U.S. e-commerce firm called Ironside Technologies.
Adamou says an IPO of Ironside is highly likely and that would be a boon
for Beamscope. The trouble with this stock is that Beamscope's core
business has had problems. Beamscope is an inventory management firm
that lost money last year due to a large backlog of orders. But trading at
less than $5 Canadian a share, Adamou thinks the potential upside from an
Ironside IPO outweighs the risks.
Now if you're willing to accept big risks, you might want to take a look at a
company called CryptoLogic. The company makes software for online
gaming sites. But Brandon Osten, an analyst with Sprott Securities in
Toronto, says even though this is a company that seems the epitome of
risk, it is actually one of that rare breed of Internet stocks: It is profitable.
CryptoLogic makes money from every dollar wagered in online casinos that
use CryptoLogic's licensed software. Internet investors might not be looking
at such trivialities as P/E ratios, but for what it's worth, CryptoLogic is
cheap, trading at about 10 times Osten's 1999 earnings estimates.
Finally, if you're looking for a safer way to invest in Canadian Internet
prospects, you could go with two larger, more established companies:
e-commerce firm BCE Emergis and software maker Open Text, which
already trades on Nasdaq under the symbol (OTEX). David Beck, an analyst
with TD Securities, the research arm of Toronto Dominion, says BCE
Emergis is a big player in the potentially lucrative business-to-business
e-commerce market. Online bill presentment and mortgage appraisal
services are two of its biggest businesses. And from a security standpoint,
it helps that Emergis' majority owner is BCE (BCE), Canada's largest
telecommunications company.
Open Text has already had an Internet-related runup, nearly doubling since
March. The company is more of a corporate enterprise software firm than
pure Internet play but the stock has risen due to buzz about a new search
engine for corporate intranets that Open Text was developing. (It unveiled
the software at an industry conference this week in Atlanta.) Open Text also
owns a small stake in MiningCo.com (MINE), a portal that recently went
public. Open Text is not cheap, trading at 60 times fiscal (ending in June)
1999 estimates. But at least it has earnings. And a multiple of 60 is
downright thrifty for a company with an Internet angle.
Of course, Internet companies are risky investments, no matter what side of
the border they're on. But if you think you've missed out on some of the
U.S.'s better Internet plays, these Canadian ones could be worth a look,
either by buying their Toronto-listed shares or, when available, the
Nasdaq-listed stocks of these Canadian companies. Just stay away from
those mining stocks, unless you want to get stuck with what seems like
the Canadian version of Zapata (ZAP).
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