4 ‘work from home’ stocks to buy

Waterloo, Ontario-based Chartered Financial Analyst Moez Mahrez highlights four junior Canadian technology stocks that may benefit from the trend to ‘work from home’.

canadian_technology_stocks

Chartered Financial Analyst Moez Mahrez highlights four of the junior Canadian technology stocks he believes will benefit the most from the growing `work from home` movement.

This month’s stock screen aims to identify companies that will continue to benefit from the ‘work-from-home’ (WFH) or ‘work-from-anywhere’ trend as work environments increasingly become more flexible. Here are some of the obvious winners:

■ Zoom (NASDAQ—ZM): voice-over-IP communication;

■ DocuSign (NASDAQ—DOCU): digital contracts;

■ CrowdStrike (NASDAQ—CRWD): cybersecurity;

■ Twilio (NYSE—TWLO): cloud communications.

All of the above have shown returns of over 100 per cent year-to-date (YTD). (Zoom is at 270 per cent YTD as we write this.) As their share prices continue to climb, it becomes more difficult to justify these higher valuations. To identify potential ‘undiscovered’ opportunities, we screened for companies that have appreciated less than 40 per cent YTD and showed at least some year-over-year revenue growth.

About the screen

We were not very strict on the fundamentals criteria as there are not many WFH-specific stocks to begin with. Our screening approach was also a bit different this time around as there is no WFH filter one can use. To work around this, we used the newly released WFH ETF to filter for US stocks. To find Canadian stocks we filtered for the same industries found in the WFH ETF and checked to make sure their products and services were related to the remote-working trend.

Though we would not expect the same returns in the short-term seen by the more obvious names, the pandemic-induced shift to remote working has shone a light on a new way of managing/hiring employees for employers around the globe, which, in turn could open up the doors to other needs in this niche.

You may recognize many of the US names, some of which are obvious large technology stocks that seem to benefit from almost any innovation in technology. Other up-and-coming US names on our list were Fortinet (NASDAQ—FTNT), Infosys (NYSE—INFY), Workday (NASDAQ—WDAY), Box (NYSE—BOX) and Slack (NYSE—WORK).

However, we also like to highlight small to mid-cap Canadian technology stocks. So here are four notable ones, which benefit from the WFH trend in a less direct way, but also happen to have the highest one-year revenue growth estimates on this list:

Vecima Networks Inc. (TSX—VCM)

VCM provides technology to support network providers, broadcasters and content creators. From a WFH perspective, the company is likely to benefit from its cloud storage business catered to content creators. The coronavirus has forced many content creators to move the storage of video content to the cloud. An example of this would be the increased journalism that is done from home and outside news media corporate offices. The protection of this media content is crucial, which is another area that VCM focuses on. VCM also has a telematics business which helps customers track vehicle fleets; this will likely become more relevant if companies begin to consider creating more jobs out of office to cut down on real estate costs. The company has a solid balance sheet with a net cash position of $30 million and pays a 2 per cent dividend yield, which is decent for a technology stock. The downside to this name is that revenue growth has been slow and the company has not been profitable since 2018. However, VCM is expected to grow its profits over the next few years due to increased demand for its services. Finally, the company has a $240 million market cap, so its smaller size is a risk investors should consider.

Blackline Safety Corp. (TSXV—BLN)

Blackline manufactures and markets worker safety-monitoring products and services—such as gas detection and evacuation devices—and may benefit from companies assigning more employees to work alone, particularly in the industrial sector where employees spend a lot of time on construction, manufacturing, energy and mining sites. While we would not consider this a WFH stock per se, an increase in health and safety precautions in the workplace may result in more employees working in isolation. Another point worth noting is that the industrial sector is often the first place that sees an economic recovery, as businesses prepare inventory ahead of consumer demand. BLN is also a company with a good balance sheet and little debt with a $20 million net cash position. The company has a stable business and is growing revenues and margins; however, BLN is not yet profitable, cash flows are still negative and the company is relatively small in size at a $292 million market cap. BLN trades at roughly 5.3 times forward sales, which is on the expensive side for a company that primarily sells devices and hardware.

Enthusiast Gaming Holdings Inc (TSX—EGLX)

EGLX is a gaming events, media and advertising company and is set to benefit from the accelerated growth of the gaming industry as well as more individuals (including employees) spending time at home. Less commuting to work means gamers will not only have more time to play, but a much easier transition from ‘work to play’, simply due to already being in the same location. One of the unique potential tailwinds of the gaming industry is that many of its participants are in an age group that is part of the workforce, compared to a decade ago when most participants were too young to buy their own games. EGLX stands to benefit from the advertising dollars realized from this new phenomenon. EGLX has good prospects and management is likely motivated with 18 per cent insider ownership among top executives. However, the company is still quite small ($83 million market cap) with lots to prove, and has recently taken on significantly more debt. While EGLX has not shown the growth many investors were expecting from a gaming company (reflected in its YTD performance of -19.7 per cent), it is a stock worth watching as a unique advertisement play in a booming industry.

Sangoma Technologies Corporation (TSXV—STC)

Sangoma Technologies is probably one of the Canadian names with the most direct exposure to the WFH trend. STC has been getting investor attention due to its voice-and-data connectivity components for software-based communication applications. The stock has recovered well from the March sell-off but is still down 4.4 per cent on a year-to-date basis. In addition to providing components to communication service providers, the company also provides communication software to small to medium-sized businesses, which will likely need these services to continue operating their businesses remotely. The company has a good track record with revenues averaging over 100 per cent growth in 2018 and 2019 and has more recently shown strong earnings and margins growth. The company is also profitable and cash flow positive.

While we are not endorsing any particular company on this list, we think this is a good place to start for investors looking for exposure to companies that participate in the shift to more remote-work business models. Some of these companies may not be directly related to teleconferencing or work collaboration, but this goes to show that WFH may have implications on other industries even outside of corporate communications.

Disclosure: Employees of 5i Research involved in the research process cannot trade in Canadian-traded stocks and do not hold a financial interest in Canadian companies mentioned.

This is an edited version of an article that was originally published for subscribers in the October 2020/First Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

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