Time ripe to bolster portfolio with tech stocks

Technology is alive and well, and, bit by bit, the sector is regaining some of its luster - and credibility. Just ask any one of Canada's leading technology companies.

Around the world, big bets are being made in anticipation that the technology sector is on the mend, after hitting highs in early 2000 and then crashing.

From steadying orders and better-than-expected profits to a rise of promising technologies such as wireless internet and digital entertainment, tech's long winter may be starting to thaw.

There's also renewed excitement for the sector, as investors have gobbled up technology shares at a fierce rate since the beginning of the year.

Despite warnings from market analysts who claim valuations are rising to the point where prices aren't justified, investors continue to push tech stocks higher.

The NASDAQ, where many of the highest-octane stocks trade, is up close to 25 per cent this year in anticipation that better times are coming. According to its 6th annual report on the sector, Deloitte & Touche says 15 of Canada's 50 fastest growing technology companies are located here in Ontario - and their revenues are growing, despite the tough environment.

Eight of them reside in the GTA and include Toronto-based DWL, Klick Communications, DreamCatcher Interactive; Mississauga-based Certicom Corp. and Hydrogenics Corporation, to name a few.

Hydrogenics, founded in 1995, was recognized in the June issue of Profit Magazine as the fastest growing company in Canada, based on revenue growth of 16,298 per cent over five years.

The company designs and builds power generation products and fuel cell test and control systems. In simple terms, fuel cell technology involves converting chemical energy from hydrogen and oxygen into electrical energy. It is similar to a battery in that it has an anode and a cathode. However, a battery is only capable of storing power, whereas a fuel cell can generate it, so long as hydrogen, the fuel, is being supplied.

The company started with 25 employees when it moved to Mississauga three years ago. Today, there are 270 employees worldwide.

"Business is growing because the potential is there," says Jane Dalziel, Director of Communications for Hydrogenics. "There are environmental issues and issues of security...that have created interest. Governments are also putting more support behind our work."

"The decentralization trend we are experiencing indicates that the Canadian technology sector is vibrant and maturing," says Garry Foster, National Director, Technology, Media and Telecommunications for Deloitte & Touche. "The rise of tech-oases signals that there is still a vast potential for growth for Canadian technology companies both as individuals and as an industry."

Once brimming with dot-com companies, the technology sector in the late 90s made many investors extremely wealthy overnight. But the party quickly came to an end in 2000, leaving many retail investors who didn't get out in time licking their wounds and skeptical about the industry as a whole.

Companies that have survived the downturn in recent years, Foster says, have managed to stay afloat because they continue to offer great service and have a business model that works.

"Being able to sustain consistent revenue growth year-over-year, even during long periods of market downturns, shows that these companies have implemented best business practices that are fundamental for success in the long run," says Foster.

Looking forward, there's lots of room for the technology sector to grow. In fact, it will likely accelerate. Computer-chip performance keeps doubling every 18 months, and disk-drive capacity and Internet-connection speeds are growing even faster. That's spurring new products, from MP3 and DVD players to mobile phones that take photos and wireless networks for homes.

A report released in April predicts that worldwide business to business e-commerce revenues will surpass US $1.4 trillion by the end of 2003, and US $2.7 trillion by 2004. Another report indicates that a growing number of U.S. companies are at a critical juncture where more business activities are moving to the Internet.

The problem is these companies don't have the equipment in place today to handle the traffic. Increased spending on information technology in the months and years ahead is expected to grow to keep up with the demand.

The industry's top players recognize the need to position themselves for better days ahead. In recent months, the biggest players have increased spending and they're designing news strategies with hopes they'll dominate when the tech sector gets back on track.

Take, for example, Japan's Sony Corp., which is investing roughly $3 billion over the next three years on new chips for devices in the digital home, allowing a fusion of computing, surfing, gaming, video and entertainment services on easy-to-use home networks.

Qualcomm Inc.'s latest chips and software already are hastening the arrival of next-generation mobile-phone services, including the ability to shoot videos with cell phones and instantly transmit them to friends or business associates. Buyers also are showing excitement about newly emerging technologies that promise to make operations more efficient.

Wal-Mart Stores Inc. is betting heavily on radio-frequency identification (RFID) chips, which will allow it and its suppliers to track goods all the way from the factory to the checkout counter.

The technology is expected to reduce theft and other losses, cut the number of people in warehouses and stores who must track goods, and boost sales by making sure no item is out of stock. Sanford C. Bernstein & Co. projects that by 2007, Wal-Mart could boost earnings 38per cent by using RFID technology.

Microsoft is pouring billions into its next version of Windows operating system, code-named Longhorn, due in 2005. If everything works as planned, Longhorn promises major improvements in everything from the look and feel of the software to an all-new file system that makes it much easier to store and find information.

If you're looking to add some technology names to your portfolio, select quality companies with clean balance sheets and a sustainable growth model.

Only companies with deep pockets, the most innovative technologies and the most aggressive strategies will increase their revenues and profits at healthy rates. These are the best companies to own.