On the Hunt for Undiscovered Tech Stocks in Canada

Suddenly, Canadian tech stocks are burning up the tundra. But of course you already knew that, thanks to the recent work of John Roque, David Kurapka and Derek Moscato.

Three good articles in one month would normally be my cue to look elsewhere for material. But for the past few months I've been corresponding with Sundeep "Sunny" Jain and Dan Behroozi, managers at the Canadian division of a major U.S. company who moonlight as e-commerce consultants and money managers, and who specialize in undiscovered Canadian tech stocks. The first two companies they mentioned, Certicom (CIC: Toronto) and BCE Emergis (IFM:Toronto), are each better than 200% since November 1999, so I thought you might like to hear what else they're buying.

But first, let's clear up a few things about Canadian stocks: Some trade on U.S. exchanges, with familiar three- and four-letter tickers. But most trade on the Toronto or Canadian Ventures exchanges, and quotes can be found on some financial sites (though, unfortunately, not this one) by adding a .TO or .V ticker suffix (XYZ.TO or ABC.V, for example).

Meanwhile, the real micro-caps trade on Toronto's OTC (a.k.a. CDN) market. To get quotes for them, go to the Toronto Stock Exchange Web site (www.tse.com) and click on the "Quote Look-up" button in the top left corner. On the next screen, open the drill-down menu where it says "TSE-Equities" and choose "CDN-Equities." Then type in the ticker.

To research these companies, check out www.sedar.com, which, George Washington University super-librarian Gary Price says is the Canadian equivalent of 10K Wizard (www.10kwizard.com).

Trading CDN stocks can be a little tricky, with procedures varying from broker to broker. Clients of Charles Schwab, for instance, call a special 800 number to reach the "international desk" for quotes, and can then either trade through the person who gives the quote or trade online using a special ticker symbol. Schwab automatically converts everything from Canadian dollars to U.S. dollars, so currency translation isn't an issue.

Currency risk, however, is an issue. When you buy a stock denominated in a foreign currency you take on the added risk of a fall in the value of that currency. For instance, if the Canadian dollar goes down against the U.S. dollar you lose, even if the price of your Canadian stock stays the same.

Also keep in mind that there can be tax issues associated with foreign investing. For a recent example, see TSC's story on the U.S. tax consequences of BCE's (BCE Quote - Cramer on BCE - Stock Picks) spinoff of Nortel Networks (NT Quote - Cramer on NT - Stock Picks).

As for what Sunny and Dan like these days, "We're following about 20 companies with great prospects," says Sunny. "But we've narrowed it down to three which we think will be absolute rockets." From here on out, everything in quotation marks is from Sunny, Dan or both.

Janna Sytems (JAN:Toronto) is carving a growing niche in customer relationship management (CRM) systems and technologies. Customers include MCI WorldCom (WCOM Quote - Cramer on WCOM - Stock Picks), Southwestern Bell Telephone (DSW Quote - Cramer on DSW - Stock Picks), the Chicago Board of Trade and Wheat First Union, investment subsidiary of First Union (FTU Quote - Cramer on FTU - Stock Picks). Jeff Dossette, Microsoft (MSFT Quote - Cramer on MSFT - Stock Picks) general manager for new business strategy, is a member of its board.

Revenues for the most recent quarter were up 93% and earnings rose 150%.

"Janna is the E.piphany (EPNY Quote - Cramer on EPNY - Stock Picks) of the great white north." But the market doesn't see it yet: E.piphany's revenues are about triple Janna's, but its market cap is 20 times as high -- and it's losing money, while Janna is profitable. "With only 18 million shares outstanding, large blocks of [Janna] shares are hard to buy -- makes the stock move very quickly."

Research In Motion (RIMM Quote - Cramer on RIMM - Stock Picks) is a leader in mobile communications solutions like email, wireless handhelds, two-way pagers and wireless modems. Customers include Intel (INTC Quote - Cramer on INTC - Stock Picks), Dell (DELL Quote - Cramer on DELL - Stock Picks), BellSouth (BLS Quote - Cramer on BLS - Stock Picks), Credit Suisse First Boston and Merrill Lynch (MER Quote - Cramer on MER - Stock Picks). Nortel Networks, meanwhile, recently invested $25 million in Research in Motion.

Revenue was up 35% in the most recent quarter and gross margins are widening. Its stock has run from 7 to 75 in the past year, giving it a market cap of more than $4 billion. "But considering RIM's rate of growth and the potential of the wireless industry, there is still considerable upside left. ... Our 12-month price target is 95."

But their real favorite is EWMC International (EWMI:CDN), a tiny company whose "reverse polymerization" technology might be a breakthrough in the disposal of medical waste, old tires and possibly pesticides and paint.

A new chief executive officer, Robert Bryniak, former vice president of business services at Ontario Hydro/Ontario Power Generation, is in charge. And EWMC systems are starting to sell. One recent purchaser, according to Sunny and Dan, labeled the technology "untouchable in the medical waste destruction arena."

Meanwhile, "In January, [EWMC] started putting out some big newspaper ads asking to hire everything from sales/marketing folks to engineers and vice presidents! This company really seems like it is poised for some huge growth over the next year."

But with a market cap of only $14 million and a stock that trades on the Toronto OTC, this might be the most speculative idea that has ever appeared in this column -- so do some serious research (I'm not kidding!) before deciding to buy.

And here's a Canadian stock I've been long for three strange years: Counsel (CXSN Quote - Cramer on CXSN - Stock Picks) is a Toronto-based holding company that during the 1990s bought, built up and sold a series of managed-care firms. The last sale drew a lawsuit from the irate buyer, which sent Counsel's stock spiraling down into the $2 range.

Then, out of the blue, Counsel announced it's shifting gears from health care to the Internet, and started buying chunks of private business-to-business companies. Now it's an "incubator," and the stock is starting to perk up.

But I'm not sure what to think. It seems a little late in the game to make like CMGI (CMGI Quote - Cramer on CMGI - Stock Picks). On the other hand, if one or two of these startups turns into a hot initial public offering, Counsel's asset value might soar. Your thoughts are welcome.

And if you know of any other undiscovered Canadian stocks, send 'em on in, and I'll work them into a follow-up column.