Taking stock of the Canadian IT industry – and it’s not pretty

Let’s launch my first column of 2006 on a sour note – with hope that things can only get sweeter from here.

Conventional investing wisdom suggests that you should have an advantage by investing in shares of companies in an industry with which you’re very familiar. Given the readership of this publication, you are no doubt licking your wounds from following that advice in 2005.

Let’s face it: Canadian IT companies still suck, and I’m worried about that. The rug was pulled out from under our sector in the spring of 2000, and signs of a recovery are still nowhere in sight. I pity those readers whose income is significantly dependent on a stock option or stock ownership plan. I truly hope that your company outlasts the drought, so you can see some gains before you retire.

There’s lots of evidence to support this position. (I rely mainly on the data from publicly traded companies, because it’s readily available, but there’s no evidence to suggest that privately owned companies fare any better or worse).

The most broadly based measure of stock performance in Canada is the S&P/TSX Composite Index which was up +22 per cent in 2005, due largely to the Energy and Mining sectors. In essence this has been an excellent year for investors with a diversified portfolio of Canadian stocks.

Now, let’s look at the S&P/TSX Information Technology Index. It was down – 13 per cent for 2005. My own analysis of 200+ Canadian IT companies (there were nearly 500 five years ago) shows a median decline of -17 per cent in share price. Combining those stats, that’s a 35-40 per cent disparity between losing out by being “tech-loyal” and simply buying a fund that tracks the overall Canadian market. How things have changed since the glory days of the late ’90s.

What’s worse is that 40 per cent of the publicly traded Canadian IT companies in my database are now trading at less than $1 per share. Twenty per cent are trading at less than 25 cents. That makes it almost impossible for those companies to raise new capital through secondary equity offers, so they’ll have to resort to borrowing to stay afloat.

So, is there any light at the end of the tunnel? Possibly, but I’m relying on U.S. stats at this point. I like to follow a monthly CIO Tech Poll run by Ed Yardeni, chief investment strategist of Oak Associates. It tracks budgets allocated to IT expenditures. If IT buying is projected to increase, then the IT providers of such products and services should do well too.

Although the findings are often notoriously volatile, the results have been quite positive recently. December’s survey has 70 per cent of CIOs reporting that they’ll increase IT spending in 2006. The average increase will be nearly eight per cent over the next 12 months. That’s up considerably from the figures reported in both October and November.

So, the news isn’t all bad. It’s possible that at least some Canadian IT companies will do better this year.

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