Evidence is mounting that the technology sector may finally be back in favour with investors. A research report issued by Paradigm Capital’s technology team last week argues that we could be in the early stages of a new bull market for tech stocks. The report says market fundamentals are improving across the sector, sparked by such catalysts as ever-increasing appetite for bandwidth, resurgent popularity of certain consumer technology, the shift towards a software-as-a-service delivery model, and the wireless data trend.
With last month marking the tenth anniversary of the peak of the Nasdaq Composite Index – and the Index still trading more than 50% off those levels – tech stocks have arguably spent a full decade wandering in the proverbial desert. For those of us who devote efforts to getting investors interested in technology ideas, at times it has seemed like the wandering might well continue for the full Biblical period of 40 years. But as Paradigm points out, for the first time in over a decade, the Nasdaq has begun to outperform the broader S&P 500 Index.
In a recent analysis of 130 Canadian small-cap tech stocks, M Partners calculated that these stocks, as a group, outperformed the S&P/TSX Composite Index by 42% in the past year. And yet, on a price/earnings multiple basis, they are trading at a 32% discount to the Index. Of the 130 stocks, 96 showed positive returns in the past 12 months, including 35 that returned 100% or greater. As M Partners summarizes, picking a winner has been “like finding a needle in a needle store.”
A few weeks ago, I attended the RBC Capital Markets Growth Technology & Communications Conference. In its synopsis of the 11 companies that presented, RBC concluded that they are poised for growth after successfully managing costs over the past two years and maintaining solid balance sheets.
A good indicator of market sentiment will be the success of new financings. The IPO window has effectively been closed for this sector since late 2007, and a number of tech companies have been waiting patiently for their opportunity. Our conversations with investment bankers indicate that there are a number of deals that could launch this spring. But it’s no slam dunk, with one planned IPO having been postponed last week. It will be very interesting to see how upcoming offerings fare.