Growth stocks show no signs of slowing down and as such, the technology sector is poised to outperform once again in 2020. Last year, I highlighted three of the top tech stocks heading into 2020. Each were added for their own defining feature and were as follows:
- Top tech stock for growth: Shopify (TSX: SHOP)(NYSE:SHOP)
- Top teck stock for value: Open Text (TSX: OTEX)(NASDAQ: OTEX)
- Top teck stock for income: Sylogist (TSXV:SYZ)
How did they perform? Shopify once again dominated. As of writing it has gained 158% on the year, thus reaffirming itself as one of the top tech stocks on the TSX.
Open Text also fared quite well, with returns close to 30% on the year. Both stocks handily beat the TSX, which had its best year since the financial crisis.
On the flip side, Sylogist had a disappointing year. The company’s stock dropped by approximately 20% in 2019. The investment thesis around Sylogist was predicated on the fact that it was one of only a few tech-listed Canadian Dividend Aristocrats. It had the highest yield and one of the longest dividend growth streaks in the sector.
In August, the company extended its dividend growth streak to nine years when it raised the quarterly dividend by approximately 5.26%. This was well below its historical average and a reflection of a disappointing year.
Looking forward, it doesn’t look like Sylogist fortunes are about to change. Estimates are for negative earnings growth (-15%) in 2020. Not only can this impact the company’s share price, but the dividend suddenly doesn’t look all that safe either.
Currently, it has a payout ratio of approximately 75%, which will likely rise to 108% based on next year’s earnings estimates. The investment thesis has changed, and at this point, I would stay clear of Sylogist.
What about Open Text? Does it still provide excellent value? Now that the company has rebounded, it’s not as cheap as it once was, but it still provides decent value. The company is trading at only 14 times forward earnings and is expected to grow earnings in the high single digits.
Recently, the company announced one of the largest acquisitions in its history. In November, it announced the US$1.42 billion of cloud-based security firm Carbonite (NASDAQ:CARB).
It’s the second largest acquisition in the company’s history and is expected to be highly accretive to adjusted EBITDA and cash flow as early as 2021.
As a serial acquirer, Open Text’s growth estimates are consistently being revised upwards. Analysts are overwhelmingly bullish on the company with 14 of the 16 analysts covering the company rating it a “buy.”
As analysts start to digest the impact of the Carbonite deal, expect estimates to be revised upward once again. Given this, Open Text should have another strong year.
Finally, we take another look at Shopify. The comparisons to Amazon (NASDAQ: AMZN) are justified, as Shopify has been the best-performing stock on the TSX. Since its IPO in 2015, the company’s stock price has skyrocketed by 1,341%!
In 2019, the company’s stock doubled yet again and there appears to be no stopping this juggernaut. In 2020, the company is expected to growth revenue and earnings by 35% and 57%, respectively. Once again, these numbers rank among the top growth rates on the TSX.
Shopify isn’t cheap — and it’s never been cheap. A rich valuation hasn’t stopped the company from outperforming in each of the past five years. Will valuations catch up to the company in 2020? It doesn’t look likely.
As of writing, the company is trading at 28.5 times sales. Although expensive, this is below Shopify’s peak of about 35 times sales. Since its IPO, the company has missed on earnings only once.
As long as the company continues to meet or beat earnings estimates, there’s no reason to expect that the company won’t outperform again in 2020.
