Look for top tech companies in Canada with hidden assets in research spending, and potentially profitable niches for your best chances of success
The success or failure of new tech stocks depends on a variety of factors. There may be benefits to investing in new technology, especially if the technology looks like it has a good chance to be commercially viable and is not merely speculative or conceptual.
Technological advances come in spurts, and tech companies tend to leapfrog each other. All in all, we think you should focus on top tech companies in Canada with a variety of existing or soon-to-be-released products and avoid one-hit wonders.
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Look for hidden value in research and development to pinpoint the top tech companies in Canada
Technology stocks have always represented a more aggressive segment of the stock market, but the top tech stocks with the greatest long-term potential are those that continue to make significant investments in research and development.
The investment odds are against you in a “hot” market—one where investment appeal is widely, if not universally, recognized. And many tech stocks are overpriced. This is because many investors have inflated ideas of their value.
You can turn the odds in your favour by investing in tech stocks that have hidden assets. These are assets that other investors very often overlook and are a key part of our Successful Investor approach.
Hidden assets are items that don’t necessarily show up on a company’s balance sheet, but can offer dramatic rewards for investors who do their research.
Among stocks of top tech companies in Canada, research-and-development spending is today’s best-hidden asset. High research-and-development budgets let tech stocks keep adding profitable new products and improving existing ones.
Technology stocks have to treat this spending as a day-to-day expense, much like maintenance or taxes. So research spending lowers the current year’s earnings. As a result, earnings per share for tech stocks may appear lower than for stocks in other industries. But, when done right, research and development spending pays off in dramatic long-term returns, both for high-tech companies and for those who invest in top tech companies in Canada.
Keep risk in mind when investing in top tech companies in Canada
There’s a delicate balance between risk and reward with tech stocks.
Many new tech stocks are brought to the public through major investment banks, but are still unknown to most investors. This makes new tech stocks even more intriguing to some investors.
The best tech stocks are on a rapid growth path and will continue growing. Some of the best technology companies eventually become so successful that they start paying dividends. Investors should also scour a technology stock’s financial statements to glean any hints of hidden value such as research and development or other valuable long-term assets.
Successful tech stocks can experience enormous growth. However, technology stocks are also susceptible to lots of market volatility—and negative news can throw tech stocks into steep declines.
Fast-changing technology offers huge opportunities when investing in new tech stocks. However, fast change can also bring dangers. Technology stocks may have a role in your portfolio, but you should be well aware of the risks involved with high growth securities like these.
Interested in finding the top tech companies in Canada to buy? Look to invest in companies that are free of high debt.
When you’re researching growth stocks, you need to know how much debt they’re holding. Growth companies with a lot of debt have a hard time recovering from an economic downturn.
The more manageable the debt, the better. When bad times hit, debt-heavy companies often go broke first. That’s especially true for ones that also keep trying to allocate part of their cash flow to paying dividends.
Use our three-part Successful Investor approach for investing in top tech companies in Canada
Hold mostly high-quality, dividend-paying stocks.
Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
Downplay or stay out of stocks in the broker/media limelight.
Bonus tip:CGI Inc., Toronto symbol GIB.A, is among the top tech companies in Canada for aggressive investors
The stock lets investors tap Canada’s largest provider of computer outsourcing services. It helps its clients automate certain routine functions like accounting and buying supplies. That makes companies more efficient and lets them focus on their main businesses.
CGI follows what it calls a “Build and Buy” strategy. The “build” part refers to the expansion of its relationships with current clients as well as the development of new ones. The “buy” part involves making acquisitions. The company tempers the risk of buying other companies by targeting firms that complement its expertise or that help it to expand geographically.
CGI prefers to reward investors with share buybacks instead of paying dividends. As well, the company’s contract backlog is healthy at $23.06 billion, or 1.9 times its total annual revenue. That cuts your risk.
Do you fear that tech regulations will make top tech companies in Canada less profitable?
With so many tech stocks on the market, how do you determine which of them belong in your portfolio?
Comments
Bryan
I bought CGI.A – I believe when you first recommended it — and still own it.–THX
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I bought CGI.A – I believe when you first recommended it — and still own it.–THX
I have bought CGI several times and continue to hold CGI in several accounts. At an ACB of $28.43, I am extremely happy with this equity. Thanks Pat.
Thanks for your feedback!