Canadian Tech Firms Poised for U.S.-Like Growth

VANCOUVER -- Remember those beer-peddling hosers from Canada, Bob and Doug McKenzie? If they weren't busy campaigning to keep the National Hockey League's Senators in Ottawa they'd be enticing American technology investors to take off to the Great White North.

Tech firms north of the 49th parallel are on the cusp of a boom that some investors think will bring to Canadian markets the same explosive growth Americans have enjoyed the past three years.

Already the Toronto Stock Exchange 300 index, Canada's most-watched stock market benchmark, has been a stellar performer as tech gorillas like Nortel Networks (NT Quote) and JDS Uniphase (JDSU Quote) help power it to new highs. In 1999, the index returned a whopping 30%, outpacing the Dow Jones Industrial Average and the Standard & Poor's 500, which gained 25.2% and 19.6%, respectively). It was the first time since 1993 Canadian shares bested their U.S. cousins.

Americans, of course, have been mesmerized by their own tech bull market, which saw the Nasdaq power 85.6% higher in 1999. For those Yanks willing to look North, however, investing in Canada will get a little easier this summer when the highflying Navigator Canadian Technology fund becomes available to non-Canadians. The $104 million fund was created two years ago for Canadian retail investors, many of whom bulk up on Canada-heavy mutual funds for their tax-deferred Registered Retirement Savings Plans. (The Canadian government requires that at least 80% of the content of these funds be in domestic issues.)

Demand in the U.S. is expected to be high. In 1999, Navigator was up 120.6%, better than higher-profile U.S.-based funds like AIM (GTTCX Quote)Global Telecom and Technology and Fidelity (FBIOX Quote)Select Biotechnology, which were up 108% and 77.7%, respectively.

"Some of the best companies in the world are under our noses," says Toronto-based Duncan Stewart, manager of the Navigator fund. He says many of Canada's New Economy plays are still reasonably valued compared with their American counterparts.

In the coming year, Stewart believes the biotech sector -- a black sheep for investors during the tail end of the 1990s -- will finally get its due. Expectations for Canadian biotechnology companies, which constitute 30% of the fund's assets, are high. The Toronto Stock Exchange's biotechnology and pharmaceuticals sub-index has roared in recent months and currently is 69% above its 52-week low.

"It's already on a tear," he says. "Canadian biotech is little understood, and little appreciated, by either Canadians or Americans." Three of his favorite holdings from the sector are AnorMed (AOM:Toronto), Inex Pharmaceutical (IEX:Toronto) and StressGen Biotechnologies (SSB:Toronto). All three companies, which trade on the Toronto Stock Exchange, are based in British Columbia.

StressGen, which develops immunotherapy products to treat cancer, saw its shares hit a new 52-week high of C$5.45 ($3.78) on Thursday. Shares of Inex, also working on anticancer therapies, are trading at about C$10.25, also perched at a 52-week high.

Stewart also holds Vancouver-based QLT Phototherapeutics (QLTI Quote), a developer of pharmaceutical products for use in photodynamic therapy. Despite being a fan of the company, he's less bullish on its growth prospects. "Most of the run is behind you," Stewart says of the stock, which currently trades at about 62. "I'm trying to own the next QLT."

On the networking front, Stewart's a huge proponent of JDS Uniphase, citing "their incredible management, wonderful depth, huge customer list, world-beating products." The fund manager believes the Ottawa-based company "has the potential to become the Cisco (CSCO Quote) or Microsoft (MSFT Quote) of the fiber-optic phase." The company, which has an astonishing 52-week range of 16 9/16 to 213, turned heads on Wall Street last week with its acquisition of E-Tek Dynamics (ETEK Quote), an all-stock deal valued at $15 billion.

Stewart is also bullish on Geac Computers (GAC:Toronto), Canada's second-largest software developer. "A nice, cheap technology company that makes products that people need," he says.

Another company among his favorite holdings includes Digital Processing Sytems (DPS:Toronto), a maker of switching hardware and software for television and animation studios. "The industry they're in is growing, and they are growing within their industry," he says. "It's exactly what you want." The stock has soared in recent days to its current level of C$5.40, up from a 52-week low of C$1.29.

He also likes the rising fortunes of Waterloo's Mortice Kern Systems (MKX:Toronto). "A classic turnaround story," he says of the maker of Internet-friendly business management software. "The company was doing bad, now doing good. It's in a position to go from C$6 or C$7 back to C$12, with no kind of problem."

And what about Corel (CORL Quote), a company that bears a strange resemblance to fellow Ottawa-phenom Alanis Morissette in that many folks believe the best days are behind both? Stewart is cautious yet optimistic. "It is by no means the best company in the world, or even the best company in Linux," he says. "But it is a good, reasonable company, and on days that Linux does well, Corel will do well, and probably go up quite a bit. Not my favorite company, but I do own some."

Stewart isn't as sanguine about Newbridge Networks (NN Quote), another Ottawa company that endured a volatile 1999. He says a turnaround may not be in the cards -- but a takeover of the company may be.

While some Americans may correlate Canada's high-tech community with the 1970s Rush anthem "Fly By Night," Stewart is adamant that the trend north of the border is anything but. "Eight or nine years ago, there were maybe 20 to 25 high-tech companies in Canada," he says. "Now we have almost a universe here."