Recession-Proof Your Portfolio With This Technology Company

When the U.S. government is your largest customer, recessions may not be as hard as they are on your competition. Such is the case with CGI Group Inc. (TSX:GIB.A)(NYSE:GIB).

| More on:
The Motley Fool

Technology companies and “recession-proof” are two terms which often do not find themselves in the same sentence, and for good reason. Many of the most prominent tech companies focus on subscription revenue or discretionary spending trends, which typically take a hit in any sort of bear market or correction.

I’m going to discuss why CGI Group Inc. (TSX:GIB.A)(NYSE:GIB) is a great “sneaky” play on the technology sector, given the company’s focus on IT-related consulting and integration services.

Who is CGI?

As Canada’s largest systems integration and technology outsourcing company, CGI specializes in providing consulting solutions to large corporations and governments seeking assistance for a wide range of large-scale projects. The company operates around the globe, with the vast majority of CGI’s revenue originating outside Canada, making this company another one of those TSX-traded plays with currency exchange implications.

The largest customer of CGI is the American government, and given the newfound impetus of the Trump administration to increase spending on infrastructure, anticipation has begun to build that IT infrastructure will undergo a much-needed transformation, with CGI (hopefully) playing a key role.

Where is the upside with CGI?

Fundamentally, CGI is a very strong company from a valuation-multiple perspective and return-on-investment standpoint. The company is currently trading at a forward multiple of just more than 16 times earnings, with a return on equity of more than 16% and an annual earnings-growth rate in the double-digit range.

While CGI’s share price has kept pace with its earnings growth of late, investors have not necessarily shared in the gains the company has made in integrating a range of bolt-on acquisitions in recent years, which have provided CGI with additional capacity to gain market share in key geographical regions, as well as providing the company with new core competencies to tackle projects the company would have otherwise have difficulty bidding on in the past.

What is the downside with CGI?

As fellow Fool contributor Joey Frenette has noted in the past, CGI has recently undergone a series of layoffs to streamline its operations. While layoffs are rarely a good thing, the reality is that CGI has undertaken a series of acquisitions that provided duplication of services, which have been either outsourced or consolidated, providing for the type of efficiency gains, or synergies, that can only be garnered by job cuts following acquisitions.

CGI’s revenue growth has indeed slowed, although the company has continued to introduce intellectual property into many of its integrations, allowing for the potential for increased margins over time. Remember, investors: a company is valued as the cumulative value of its future stream of cash flows, not revenue, so it’s important to stay focused on the bottom line.

Bottom line

CGI has continued to churn out double-digit earnings growth for some time now, and I do not anticipate this trend will abate anytime soon. The stock is fairly valued, and I would consider buying on any dips moving forward.

Stay Foolish, my friends.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Chris MacDonald has no position in any stocks mentioned in this article. CGI Group is a recommendation of Stock Advisor Canada.

More on Tech Stocks

The virtual button with the letters AI in a circle hovering above a keyboard, about to be clicked by a cursor.
Tech Stocks

Is POET Technologies a Top AI Stock for Canadian Investors?

Canada has relatively few AI stocks, and the ones it has are different from American AI stocks in terms of…

Read more »

Rocket lift off through the clouds
Tech Stocks

2 Growth Stocks That Could Skyrocket in 2025 and Beyond

Wondering what types of stocks could rapidly rise in 2025? Check out these two stocks with substantial upside if they…

Read more »

up arrow on wooden blocks
Tech Stocks

The 3 Smartest Tech Stocks to Buy With $500 Right Now

Tech stocks can be seen as a bit risky, but these three have far less risk and more stability for…

Read more »

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Tech Stocks

Shopify: A Must-Have Growth Stock for Your TFSA Now (and the Next 10 Years)

Shopify (TSX:SHOP) stock isn't just a top growth company, it's a titan worth owning in your decades-long TFSA fund.

Read more »

cloud computing
Tech Stocks

Best Stock to Buy Right Now: Manulife vs CIBC

Want the best stocks? These two are certainly the best options. But which is the better buy?

Read more »

profit rises over time
Tech Stocks

4 Reasons to Buy Constellation Software Stock Like There’s No Tomorrow

Constellation Software stock continued its climb upwards after recent earnings, and this only adds to its appeal.

Read more »

calculate and analyze stock
Tech Stocks

1 Stock That’s Just as Hot as Nvidia (Without All the Hype)

Nvidia stock may look like a strong option, but its valuation is through the roof. Enter this other under-the-radar stock.

Read more »

A plant grows from coins.
Tech Stocks

3 Growth Stocks Wall Street Might Be Sleeping on, But I’m Not

Don’t miss your chance to load up on these three beaten-down stocks.

Read more »