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Analyst picks winners using macro approach

Kris Thompson was on vacation in Beijing this month when he received word that he had just been recognized by the financial industry as one of Canada's best stock pickers.

Remembering his five-day excursion, the analyst at National Bank Financial Inc. zeros in on the fixation of the Chinese on mobile broadband. "Everybody is using a smart phone, even on the subway," he says, before beginning an animated discussion about estimates for average revenue per user.

Mr. Thompson and his wife visited traditional tourist sites, such as the Great Wall and the Olympic National Stadium, but it's the mobile phone usage that really seems to have made the greatest impression on him. It's this kind of macro information that the 37-year-old finds invaluable in his role researching Canadian technology and communications equipment firms.

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Working 70 or more hours a week, he analyzes the domestic marketplace for public firms supplying specialized gear to larger tech and telecom companies. He begins his analysis by focusing on the big themes that will influence these firms. And it is the surging demand for wireless services today, along with the high level of innovation among companies in the field, that make mobile broadband his favourite sector.

Last year, through the pitfalls of the economic crisis and the sudden rebound, his stock picks beat the market by 27.9 per cent, earning him the Starmine analyst award as Canada's third-best stock picker.

The Canadian landscape for technology picks is thin, making it tough to find future stars that will light up portfolios. So Mr. Thompson has tailored his selection strategy to take advantage of big themes and look for where the smaller Canadian firms provide value to the bigger international players. This approach has drawn him to firms such as Bridgewater Systems Corp., whose technology helps phone companies manage customer accounts by performing tasks such as authorizing and authenticating access to networks.

"I want to know who will be the successful vendors, which Canadian firms will be best of breed suppliers," he says.

Shares of Ottawa-based Bridgewater surged almost threefold last year and Mr. Thompson continues to award it one of his few "outperform" ratings. But he's also very clear about the risks associated with the stocks on his watch. A concentration of customers - in Bridgewater's case Verizon Wireless accounts for most of its revenue - leaves management little room for error.

He is not afraid to put "sell" ratings on stocks and shrugs off the wrath of executives he has sometimes incurred in the process.

Last month he reversed his opinion on DragonWave Inc., after saying he was unconvinced the company could show revenue growth in fiscal 2011. "We believe large wins are taking longer to close than we had previously expected," he wrote in a report that downgraded the stock to "underperform" from "outperform." The Ottawa-based firm sells microwave radio technology to help carriers handle the deluge of data on their networks more efficiently.

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Within three to four years, Mr. Thompson estimates that 30 per cent of the firms he follows will be gone, in the best-case scenario bought out by larger rivals or customers. He's insistent that the country needs to see more public offerings in the tech sector to fill the void and he wants to see young companies rack up more international customers to safeguard their market positions.

Despite his outlook, he says he will never recommend a stock based on its merger and acquisition prospects. He views potential M&A activity as offering "downside protection" on some of the stocks, but anything more than that would be purely speculative. He points to RuggedCom Inc., which makes communications equipment for harsh electrical and climatic environments. The Concord, Ont.-based firm might prove to be a long-term takeover target by Cisco Systems Inc. for its products that let gear operate in electrical smart grids without electrical interference. While he likes the long-term prospects of RuggedCom, he downgraded the stock last month to "sector perform" from "outperform" because of weaker than expected revenue.

Summing up his successful strategy over the last year, Mr. Thompson says he and other National Bank analysts are not afraid to take risks, often making contrarian calls, using "sell" calls more frequently than other investment firms. He also doesn't receive much guidance from the firms he covers, forcing him to dig deep into data and channels to come up with his own numbers.

"I'm a bit cynical. I don't just listen to management teams," he says.

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