Here are our picks for 2014

NASDAQ MegaCap:

Microsoft (MSFT-Q) is well aligned to the tech replacement cycle with a modern operating system that, unlike in the past, unifies across multiple devices and both personal and work environments.

Canadian Large Cap:

Avigilon (AVO-TSX) is possibly one of the best recent IPOs in the Canadian market. We anticipate continued high revenue growth as Avigilon benefits from CCTV upgrade cycles from low-res analog to HD digital cameras. Additionally, we anticipate that Avigilon will continue to upgrade its solution to deliver stickier platform capabilities such as data analytics for increased recurring revenue.

Canadian Mid-Cap

We believe that our top picks from last year should benefit from accelerating trends from last year.

The Descartes Systems Group (DSG-TSX) should experience higher organic growth as global manufacturing continues to recover (especially throughout northern Europe where manufacturing indices are peaking). As retailing continues to transition online, the company’s new same day delivery business should also contribute to higher organic growth rates. Additionally, we anticipate that the company could execute a significant acquisition within the year, which could drive revenue further.

Mitel Networks (MITL-Q) is expected to finalize its acquisition of Aastra (AAH-TSX) early in the New Year. We anticipate that there will be a multiyear upgrade opportunity to transition both North American and European clients to software-based communications solutions.

Redknee Solutions (RKN-TSX) should continue to cross-sell and up-sell customers it acquired in the NSN transaction. We expect that the company will continue to announce meaningful contracts throughout 2014, while we anticipate that recurring revenue should increase due to price increases and to more SaaS deployments.

Canadian Small Cap

Solium Capital (SUM-TSX) should continue to benefit from an acceleration of employment globally, along with better stock markets, and an increasingly dominant position in private equity management. In particular, SUM could report exceptional results in Q1 when employees transact most actively. We also believe that after recently raising a little over $20M of capital, the company has sufficient cash and equivalents available to potentially acquire regional equity compensation portfolios in Europe and the United States.

Guestlogix (GXI-TSX) is at an early stage of rolling out its onboard payment system with In Flight Entertainment (IFE) vendors Thales and Panasonic Avionics. The rollout, along with deployments to Chinese airlines could add over $10M to its topline and more than double 2013 earnings in 2014. We don’t think that this potential is priced into the stock.

QHR (QHR-TSX) after selling its hospital management business to Logibec, QHR is positioned as a pure play EMR vendor with the potential to expand via acquisition in both Canada and the United States. We believe that revenue multiples should expand because a higher percentage of revenue is recurring, and more earnings leverage is likely in outlying fiscal years.

Canadian Micro Cap

Espial (ESP-TSX) announced a major long-term contract with Rogers in 2013 which should help to increase revenue growth and earnings for the next several years. In fact, this contract could double current revenue streams once the program is rolled out. We also believe that there is sufficient demand among multiple residential network providers for Espial’s TV-based browser.

Here is the Tech Sector Outlook:

First, we have seen significant progress in total market cap for the technology sector, which grew by 35% year-over-year.

Secondly, we saw significant growth in the mid-cap sector due to small cap companies in 2012 graduating to mid-cap in 2013. There were 6 mid-cap companies at the end of 2013, and a combined market cap of 4.2B, which is 121% higher than the previous year.

In aggregate, the small cap market only grew by 4% year over year but that was probably due to a general flow through of companies to the mid-cap group.

For the RES30, EBITDA grew by 7% to $490M, while EV grew by 35% to $9.2M.

Analysts are forecasting EBITDA growth of 161% for the entire sector, and 59% growth for the RES30 for NTM on 12.7% revenue growth. Although the revenue growth seems reasonable given the growth in the economy and general upgrade cycles, we find that analysts, in aggregate, may be aggressive in their earnings forecast because we believe that increasing OPEX spending should moderate earnings leverage.