After a year in which the information-technology index on the Toronto Stock Exchange fell almost 20%, this could be an opportune time to return to the sector. Yet, with the exception of a relatively small group of exceptional stocks, the consensus opinion of Bloomberg-monitored analysts is that investors would do well to steer clear of high-tech plays in 2006.

As an Investment Executive analysis of 33 of the country’s top technology and telecommunication stocks reveals, only 33% of the companies are considered a “buy” by most of the analysts who cover them. And only 15% of tech stocks have a sufficiently bright outlook this year to warrant a “buy” recommendation from a strong majority.

The reasons for the negative sentiment vary widely. Royal Group Technologies Ltd. of Woodbridge, Ont. — the least-liked stock, with no analysts favouring it — has been searching for an acquiror since early last year, with little evident success. Other firms, including Nortel Networks Corp. of Brampton, Ont., Sierra Wireless Inc. of Richmond, B.C., and Celestica Inc. of Toronto, are still struggling to regain the momentum they lost in the 2001 telecom crash. And other former tech stars, such as QLT Inc. of Vancouver — a developer of health products for eyes — are facing new competitive threats.

However, investors with portfolios large enough to allow for some risk could do well to consider three technology plays that have triggered “buy” recommendations from every analyst who covers them. This group includes Rogers Communications Inc. of Toronto, Mosaid Technologies Inc. and March Networks Corp. (both of Ottawa). And, because there is almost no overlap in the businesses of these three companies, investors who buy a piece of each would have the advantage of some diversification as well.

> Rogers communications. This company is probably the least risky of this small group, thanks to its lengthy operating history, solid subscriber base and exposure to several fast-growing technology sectors. For 14 of the 15 analysts covering Rogers who offer a target price, the average 12- to 18-month target is $57 a share, vs its $46.73 close on Dec. 20, 2005.

Much of this bullishness is because of the exceptional performance of Rogers’ wireless unit, which, based on reported subscriber results, is expected to post an almost 40% jump in operating profit to $307 million in the fourth quarter ended Dec. 31, up from $220 million in the same period a year earlier, according to Joseph MacKay, an analyst with Montreal-based Desjardins Securities Ltd. In part, this was because of the net addition of 235,800 subscribers and a strong jump in revenue per subscriber, reflecting growth in data services such as Blackberry communications and short-messaging services.

As a result, Rogers’ wireless group — which accounts for roughly half the firm’s total revenue, estimated to be $2.7 billion in the fourth quarter, and 55.6% of its $552 million in estimated operating profit — is more than making up for weaknesses in other company units, including its cable and video rental businesses. MacKay estimates Rogers’ sales in fiscal 2006 will reach $8.7 billion, vs a projected $7.4 billion for 2005 — more than a 17% hike. He also predicts 2006 earnings before interest, taxes and depreciation will jump 27% to $2.8 billion, vs $2.2 billion last year.

Dvai Ghose, an analyst with CIBC World Markets Inc. , is somewhat more cautious about Rogers’ progress. He maintains a slightly lower share price target of $56 and is slightly more pessimistic about company earnings. There are a handful of risks investors should take into account before diving in, Ghose says.

For example, profit margins in Rogers’ cable business remain under pressure, thanks in part to the rise in capital costs as the company adds technology to allow it to offer more phone services. And, Ghose adds, it is not a given that Rogers will continue to add wireless subscribers at anything like its current rate. Although he maintains a “buy” recommendation for Rogers, Ghose prefers Vancouver-based Telus Corp.; he believes its wireless business is stronger.

> Mosaid technologies. This is one of the most potentially lucrative technology plays in 2006. The designer of advanced memory chips has started the year determined to wrest patent licensing agreements from 13 chip firms it has put on notice. Mosaid has already extracted deals from two of the industry’s largest semiconductor firms — Samsung Group of Seoul, South Korea, and Hynix Semiconductor Inc. of Icheon, South Korea. The two firms have agreed to pay Mosaid an estimated $200 million-plus over the next six years for the right to use its memory design technology.

@page_break@Mosaid also revealed last fall it had signed a five-year licensing deal with an unidentified Taiwanese firm.

The Taiwanese pact was crucial because it was the first successful licensing arrangement since a New Jersey court ruled in April that Infineon Technologies AG of Munich, Germany, had not infringed on six of seven Mosaid patents under dispute — a decision that immediately chopped about $6 off Mosaid’s share price. However, there is a chance Mosaid could turn the tables. Late last year, the company won the right to appeal the Infineon judgment. Even though it is unlikely that the Infineon case will be resolved before late in 2006 at the earliest, Mosaid is now in a better position to negotiate licensing deals with its 13 targeted chip firms.

For investors, the significance is that any licensing pact voluntarily negotiated this year could bump up Mosaid’s share price significantly. Consider how two analysts have approached this calculation. Daniel Kim, an analyst with Paradigm Capital Inc. in Toronto, has a 12-month share price target of just $26, vs $23.31 the day he issued his report late last November. This conservative forecast is based on a jump in earnings to $1.21 a share in the fiscal year ending April 30, 2006, from $1.10 in fiscal 2005, and a 30% rise in revenue over the same period to $64.5 million from $49.7 million. However, Kim has not factored in the possibility of a win with Infineon, which, he believes, would add $14 to his target price.

Todd Coupland, an analyst with CIBC World Markets, appears more optimistic about new royalty arrangements this year. His $35 share-price target reflects Mosaid’s $5.77-a-share worth of cash — a $2.02 value for a company unit that makes memory chip-testing equipment — and $28 a share for Mosaid’s intellectual property. Coupland figures that a $23 share price reflects the reality of the Samsung and Hynix royalty arrangements. “There is upside in future deals and dividend increases, both of which are probable,” Coupland writes.

> March networks. The maker of digital video recorders used in surveillance systems probably has considerably less upside. In large part, this is because its share price has soared since Nov. 3, 2005, when the company revealed the results of its second quarter ended Oct. 31 would be much better than expected. By Dec. 31, March Networks’ shares had closed at $32.22 a share — up 78% from Nov. 3.

That was just shy of the 12-month share-price target of $33 set in mid-December by Toronto-based BMO Nesbitt Burns Inc. and Wellington West Capital Markets Inc. The rapid run-up means new investors have to take a long-term view and determine whether the investment is worth the risk.

Certainly, if March Networks continues to perform as it has, higher earnings will continue to push its share price up. Its second-quarter profits more than doubled to 30¢ a share year-over-year, while revenue surged 79% to $19.8 million in the quarter. To some extent, however, this quarter was exceptional.

Eric Appell, an analyst with Merriman Curhan Ford & Co. of San Francisco, predicts the company’s earnings will rise a comparatively modest 65% to 86¢ a share for the year ending April 30, 2006, and jump only 5% to 90¢ a share in fiscal 2007.

There is also March Networks’ high valuation to consider. On the first day of trading in 2006, March Networks’ forward price/earnings multiple had climbed to almost 37 — significantly higher than that of its two main competitors, Verint Systems Inc. of Melville, N.Y., (31.8 times earnings) and Nice Systems Ltd. of Ra’anana, Israel (29.9 times earnings).

Yes, March Networks is growing more quickly, but it is also looking expensive. IE