Top 3 Canadian tech stocks to buy now

You are better off picking individual stocks rather than buying an ETF for Canadian tech stocks. That’s because 70 per cent of the iShares Canadian technology ETF is weighted in only four stocks. Of the four, Keith Richards of Barrie, Ontario-based portfolio managers ValueTrend.ca names the three to buy—and the one to avoid.  He’s also keeping his eye on another that may be breaking out.

Canadian_Tech_StocksCanadian tech stocks are a rare species. If we look at the iShares Canadian Capped Information Technology Index ETF (TSX—XIT), it holds, brace yourself, . . . a whopping 10 stocks in its portfolio.

Compare this to the widely followed SPDR Technology Select Sector ETF (NYSEARCA—XLK) which holds 71 US stocks.

This suggests that the Canadian technology space is significantly more concentrated than the US market. It also means that buyers of the iShares ETF had better like most of its holdings, given the weighting of its individual tech stocks. More importantly: Is the Canadian tech sector worth buying at all, given the rapid moves in the US tech markets? In my opinion, you are better off picking the individual components rather than buying an ETF for Canadian tech stocks. That’s because 70 per cent of the iShares Canadian technology ETF is weighted in only four stocks.

If you don’t love those stocks, there is no point in buying the ETF for diversification. You aren’t getting much diversification in this concentrated play, outside of those four companies.

Let’s take a look at these four power-play stocks that drive the Canadian technology space. Are they attractive?

■ CGI Group Inc. (TSX—GIB.A; NYSE—GIB) is the biggest component of the iShares domestic tech ETF. It makes up 22.6 per cent of the ETF’s holdings.

At ValueTrend, we hold a position in GIB.A. It’s technically attractive. Its chart shows that the stock is in an upward trend and above its 200-day moving average.

Recently, it was stuck in a trading pattern with a ceiling at around $70 per share. The stock broke that ceiling after a good earnings report at the end of January.

OK. So let’s say thumbs up to GIB.A. Note there is a very strong similarity between the GIB.A chart and that of CSU.

■ Constellation Software Inc. (TSX—CSU) is the next-largest holding in the ETF, at a 19.5 per cent share. This stock is clearly in a positive trend.

Like GIB.A, it’s putting in successively higher highs and higher lows, and it sits nicely over its 200-day moving average.

What’s not to like about that? Thumbs up to CSU.

■ Shopify Inc. (TSX—SHOP; NYSE—SHOP) had been consolidating since April of last year. It recently broke out of that consolidation pattern by moving through the $150-per-share ceiling. That ceiling had contained Shopify since last September.

Thumbs up to SHOP, which represents more than 15 per cent of the iShares Canadian tech ETF’s weighting.

■ Open Text Corp. (TSX—OTEX; NYSE—OTEX) was similar to Shopify in that it had been consolidating since early 2017. The difference is that Shopify has since broken out of its holding pattern, as noted above. Open Text remains stuck in its holding pattern.

I would need to see a break above $48 a share before I became interested in Open Text. So, thumbs down to OTEX, which makes up roughly 15 per cent of the XIT ETF.

Conclusion: With some 15 per cent of the iShares ETF’s weighting in the sideways-trading Open Text stock, why would you buy the index ETF? Clearly, the stronger charts of CGI and Constellation Software would be offset to some degree by the dead weight of Open Text.

As noted above, we own CGI. I’d not hesitate to own Constellation and Shopify too, but I’d avoid the ETF.

■ As an aside, BlackBerry Ltd. (TSX—BB; NYSE—BB) does appear to be breaking out, and it makes up 10 per cent of XIT. So again, it could be an individual stock worthy of examination within the Canadian tech space.

We recently took a small position in this relatively more aggressive Canadian tech play based on that potential—and may add to it if the stock illustrates further technical upside.

The other stocks in the iShares ETF represent only one per cent to two per cent (approximately) each and don’t offer very good charts at all—adding to my decision not to own the ETF.

Keith Richards, Portfolio Manager, can be contacted at krichards@valuetrend.ca. He may hold positions in the securities mentioned. Worldsource Securities Inc., sponsoring investment dealer of Keith Richards and member of the Canadian Investor Protection Fund and of the Investment Industry Regulatory Organization of Canada. The information provided is general in nature and does not represent investment advice. It is subject to change without notice and is based on the perspectives and opinions of the writer only and not necessarily those of Worldsource Securities Inc. It may also contain projections or other “forward-looking statements.” There is significant risk that forward-looking statements will not prove to be accurate and actual results, performance, or achievements could differ materially from any future results, performance, or achievements that may be expressed or implied by such forward-looking statements and you will not unduly rely on such forward-looking statements. Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please consult an appropriate professional regarding your particular circumstances.

This is an edited version of an article that was originally published for subscribers in the February 23, 2018, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

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