6 technology stocks to buy; 4 to hold

Here are six technology stock buys that offer capital gains potential over the next few years. Four others of the 10 tech stocks we follow regularly are holds—mostly because they’re costly and will earn less this year.

Technology Stocks to BuySince we published our October 27, 2017 issue, the 10 technology stocks we follow regularly on our weekly The Back Page feature are down by an average of one per cent. This beats the S&P/TSX Composite Index’s decline of 2.8 per cent.

Key stocks CAE (TSX—CAE) and IBM (NYSE—IBM) (see more below) remain buys for long-term share price gains and rising dividends. IBM yields an attractive 3.9 per cent.

Carmanah Technologies (TSX—CMH), Celestica (TSX—CLS) and Firan Technology Group (TSX—FTG) remain buys for share price gains, if you need no dividends. All three are expected to earn more this year and trade at reasonable P/E ratios. Motorola Solutions (NYSE—MSI) remains a buy for share price gains and decent dividends that rise each year.

Computer Modelling Group (TSX—CMG), Enghouse Systems (TSX—ENGH), Nokia (NYSE—NOK) and Sierra Wireless (TSX—SW) remain holds. They’re costly except for Nokia. They’re expected to earn less this year except for Sierra. Computer Modelling fails to earn its dividend. Enghouse raises its dividend each year and has upward price momentum.

Buy CAE for long-term gains and growing dividends

Since we published our October 27, 2017 issue, the shares of CAE have risen by 8.1 per cent. This Montreal-based manufacturer is thought to have earned a little more in the year to March 31. In fiscal 2018 (which began April 1), CAE’s earnings growth is expected to accelerate significantly. It remains a buy for further long-term share price gains and modest, but growing, dividends. The tech stock is a ‘dividend aristocrat’ that has raised its dividend for six years in a row.

CAE calls itself a “global leader in training for the civil aviation, defence and security, and healthcare markets . . . We have the broadest global presence in the industry with over 8,500 employees, 160 sites and training locations in over 35 countries. Each year, we train more than 120,000 pilots and crew members and thousands of healthcare professionals.”

There’s a growing need for airplane pilots in general. More affluent Chinese and Indians are getting around their big countries quickly in airplanes. Increasing numbers of Asians in other countries also fly. North Americans and Europeans fly more often than before—particularly with growing immigrant populations who fly ‘home’. Young pilots are required to replace retiring pilots. All this shows up in CAE’s order backlog.

President and chief executive officer Marc Parent said: “In Civil, market activity was especially strong as we received a quarterly record, $1 billion in new orders.” The total order backlog stands at $7.368 billion. That’s more than 2.6 times CAE’s sales over the latest four quarters.

Last year, CAE is thought to have earned $1.06 a share. This would represent earnings growth of only 2.9 per cent, from $1.03 a share, the year before. This year, by contrast, the company’s earnings are expected to jump by 15.1 per cent, to $1.22 a share. Based on this estimate, the shares trade at a hefty P/E (Price-to-Earnings) ratio 19.7 times. Then again, faster-growing companies are seldom cheap.

CAE can further accelerate its earnings per share growth by buying back its own shares. That’s because the total earnings are spread over fewer shares, of course. In the year to February 22, the company spent $44.7 million to repurchase 2,078,500 of its common shares. In the year to February 22, 2019, CAE can buy back and cancel up to 5,349,604 (or two per cent) of its shares.

We usually like it when managements owns lots of the common shares directly. That way, if they do a poor job, they suffer just as much as individual shareholders do. CAE’s management owns less than 0.1 per cent of the shares. On the positive side, Mr. Parent recently owned 237,888 shares. This makes it very much in his financial interests that the shares continue to climb.

The consensus recommendation of four analysts is that CAE is a ‘Buy’. We agree. Buy CAE for further long-term share price gains as well as modest, but growing, dividends.

IBM is a stock to buy for long-term patient investors

Since we published our October 27, 2017 issue, the shares of global International Business Machines, or IBM, are up by 8.1 per cent. New York State-based IBM earned more last year and is expected to earn a little more this year. What’s more, it earns a high ROE (Return On Equity) of nearly 60 per cent. And the earnings exceed the dividends that have risen for many years. IBM remains a buy for long-term price gains as well as attractive and growing dividends. But it’s best-suited for patient investors who can accept the risk of the ever-changing technology industry.

IBM was once known for manufacturing main-frame computers and machines such as its Selectric typewriter. Now this global blue chip stock is “a worldwide supplier of technology and business services, software, and systems hardware”.

In 2017, IBM earned $13.80 a share. This was up by only 1.5 per cent from earnings of $13.59 a share in 2016, excluding one-time items in both years. Even so, the company made strategic progress in 2017.

President and chief executive officer Ginni Rometty said: “Our strategic imperatives revenue again grew at a double-digit rate [11 per cent] and now represents 46 percent of our total revenue . . . During 2017, we strengthened our position as the leading enterprise cloud provider and established IBM as the blockchain leader for business.” Ms. Rometty is planning for future success. She added: “Looking ahead, we are uniquely positioned to help clients use data and AI [Artificial Intelligence] to build smarter businesses.” IBM is growing in the most promising parts of the industry. This is necessary to offset revenue declines in other businesses. In fact, in 2017 IBM’s overall revenue was essentially unchanged.

In 2018, IBM is expected to earn $13.82 a share. This is up just slightly from the $13.80 a share it earned last year. Based on this year’s estimate, the shares trade at an attractively-low price-to-earnings ratio of 11.1 times.

Next year, IBM’s earnings are expected to advance again, to $14.12 a share. That would represent slow earnings per share growth of only 2.2 per cent. But at least the company’s results are going the right way. This gives it the means to keep reinvesting in its businesses and rewarding you.

Ms. Rometty said: “Our strong cash flow has enabled us to maintain R&D [Research & Development] investments and to expand IBM’s cloud and cognitive capabilities through capital investments, while returning capital to shareholders. We remain committed to both investing for the long term and returning capital.” In 2017, IBM spent $5.506 billion on dividends and $4.34 billion to buy back shares.

The consensus recommendation of five analysts is ‘Hold’. We disagree and maintain our ‘Buy’ rating for IBM. Its ROE is almost 60 per cent; the company’s earnings and cash flow are growing; based on these earnings the shares look like a bargain; IBM’s ongoing share repurchases will further improve its earnings growth; and the company pays lucrative dividends and raises them every year. This should attract income-seeking investors. They’ll pay you more to tap into a growing ‘cash cow’.

IBM remains a buy for long-term share price gains as well as attractive and growing dividends. But it’s best-suited for patient investors who can accept the risk of the ever-changing technology industry.

This is an edited version of an article that was originally published for subscribers in the April 13, 2018, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

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