By: Philip MacKellar

Published: Jan 27, 2026

It is top-pick season again now that 2026 is under way, and Enghouse Systems Ltd. is my top income pick for the year ahead. The Markham, Ont.-based company, which trades on the TSX, has a market cap of around a billion dollars. The business has had a rough few years and is well off the highs set during the peak of the pandemic in 2020. Despite the downdraft, the company could benefit from capital appreciation in the years ahead, and as investors wait, they will be rewarded with a yield of greater than 6 per cent.

For those new to the name, Enghouse is a vertically-focused software business. In the latest quarter, around 69.2 per cent of sales came from recurring revenue streams via its software-as-a-service (SaaS) offerings. The remaining 26.4 per cent were generated from selling one-off software licences and providing professional services, while a minor 4.4 per cent of the top line came from hardware sales.

Enghouse has two business divisions: the Interactive Management Group and the Asset Management Group. The Interactive Management Group provides customers with services to facilitate remote work, improve client engagement, and manage internal communications. Meanwhile, the Asset Management Group offers software products and services for infrastructure, transportation, and supply-chain management, among others.

The corporate growth strategy is twofold. First, it drives business through internal investment, deepening existing customer relations, and funding new software services via R&D. Second, it engages in M&A with a focus on small companies with recurring software revenue. Their M&A strategy almost exclusively focuses on bolt-on acquisitions, which they can buy with cash and integrate quickly.

The business fundamentals are solid. Enghouse has increased its top line over multiple business cycles, the balance sheet is cash-rich with hardly any debt, and it has produced consistent cash flows from operations and free cash flows over time. Insider alignment is strong, with executives and directors owning more than 20 per cent of the shares outstanding. Stephen Sadler, chairman and CEO, alone owns more than 11 per cent according to the latest management information circular.

Most important of all, the Enghouse is cheap versus its peers, the market, and is trading at its lowest level in more than a decade on a variety of valuation metrics, including price to sales, book, earnings, cash flow, EV/sales, and EV/EBITDA. As contrarian investors, we like cheap, especially when it is accompanied by the above-mentioned features.

As for risks, the valuations have faltered because revenues and net income have slipped in the past year as macro challenges mount, customers cut spending, and problems emerge with the SaaS business model. Moreover, Enghouse is considered boring older tech rather than hyperscaling AI. While the company has used AI to cut costs and drive efficiencies, it has not aggressively used AI to increase sales. However, taking time to use AI effectively and profitably is likely a shrewd move given the scale of spending in that space and the massive net losses that have come with it. Obviously, the market disagrees and wants Enghouse to jump on the AI bandwagon now.

Future M&A integration or overpaying on deals is another possible risk. Management has a good M&A track record, but they could bite off more than they can chew. One big and poorly priced deal, or many small ones, could sink the company’s prospects. This could hurt the income statement, force a goodwill writedown, and hurt owners.

Another risk is recent insider selling. While insider alignment is excellent, insiders are not boosting their stakes during this downdraft. Instead, so far this year, one insider has unloaded nearly $175,000 in stock. There could be many reasons for selling, but whatever the reason may be, the underlying message is clear: the seller values cash more than they value owning Enghouse. This insider selling and lack of recent insider buying represents a warning flag, as there is a strong argument that insiders represent the smart money.

Risks and all, Enghouse Systems is well-positioned, cheap, well-financed, widely held by insiders, and pays a generous dividend. By choosing Enghouse as a top income pick for 2026, we are betting that the executive team can navigate past its current challenges and that the market will recognize their efforts. In the meantime, investors can enjoy that generous 6-per-cent dividend.

No discussion of top picks would be complete without reviewing past picks. Ambev SA, was our top income pick in 2025, and the drinks company advanced 33.5 per cent and produced a dividend over 7 per cent during the year. Though this was a respectable return, our top growth pick, Neo Performance Materials Inc., was up 94.5 per cent and distributed dividends along the way.

Finally, it is worth mentioning that making top picks is a good exercise to focus the mind on factors that should make a stock excel soon. However, a successful run with one or more top picks is insignificant next to the power of a well-diversified portfolio. Top picks make headlines and generate some near-term gains, but prudent asset allocation builds wealth for the long term.