You can’t always believe everything you see. For example, subindexes usually offer an accurate assessment of what’s happening in a specific sector of the economy. But not always.
Look at the S&P/TSX Information Technology subindex. Based on the year-to-date gain of only 4.1 per cent, you’d think there was nothing happening there that is worth your attention.
You’d be wrong. The index is being dragged down by its largest single component, Shopify Inc. (SHOP-T), which is off 14.2 per cent so far this year. Many of the other companies in the index are doing very well, thank you.
The leader in terms of price gain continues to be Celestica Inc. (CLS-T). We recommended it in my Internet Wealth Builder newsletter in November, 2023, at $38.46 and advised taking half profits in June at $76.19 for a gain of 98 per cent in seven months. The shares closed July 12 at $81.01, up 109 per cent year-to-date.
Here are two other Canadian tech stocks we have recommended that are also posting good gains this year.
The Descartes Systems Group Inc.
Originally recommended on Oct. 30/17 at $37.83. Closed July 12 at $137.76.
Ticker: DSG-T
Background: Descartes provides on-demand, software-as-a-service products focused on improving the productivity, performance and security of logistics-intensive businesses. Customers use its services to route, schedule, track and measure delivery resources; plan, allocate and execute shipments; rate, audit and pay transportation invoices; access global trade data; file customs and security documents for imports and exports; and complete numerous other logistics processes. The company’s headquarters are in Waterloo, Ont., and Descartes has offices and partners around the world.
Performance: We recommended taking half profits in March, 2023, when the shares were trading at $103.27, giving us a gain of 173 per cent to that point. This means we have a guaranteed profit no matter what the stock does from here. Fortunately, it’s still rising, with a year-to-date gain of 24 per cent. The shares are currently trading at $137.76, near the all-time high of $138.57. The stock is up 264 per cent since the original recommendation.
Recent developments: The company recently released first-quarter results for fiscal 2025, for the three months to April 30.
Revenues were US$151.3-million, up 11 per cent from US$136.6-million in the first quarter last year and up 2 per cent from US$148.2-million in the previous quarter.
Net income was US$34.7-million (40 US cents per diluted share), up 18 per cent from US$29.4-million (34 US cents per share) last year. Net income as a percentage of revenues was 23 per cent, compared with 22 per cent a year ago.
Adjusted EBITDA was US$67-million, up 16 per cent from US$57.7-million in last year’s first quarter. Adjusted EBITDA as a percentage of revenues was 44 per cent, compared with 42 per cent a year ago.
“Global trade is complex and constantly evolving. Supply chains and logistics operations continue to be impacted by a myriad of factors, including military conflicts, disruptions to trade routes, government sanctions and material changes to taxes and tariffs,” chief executive officer Edward J. Ryan said. “Our technology solutions are designed to help shippers, carriers and logistics services providers manage this dynamic complexity.”
Acquisitions: Descartes grows its business both organically and through acquisitions. It added two new companies in the quarter.
On March 28, Descartes acquired U.S.-based OCR Services Inc., a leading provider of global trade compliance solutions and content. The purchase price was approximately $82.8-million, which was funded from cash on hand.
On April 22, Descartes acquired U.K.-based Aerospace Software Developments Ltd., a leading provider of customs and regulatory compliance solutions. The price was approximately $62.5-million, net of cash acquired, which was substantially paid at closing from cash on hand with the remaining $5.1-million expected to be paid by the end of Descartes’s fiscal 2025 fourth quarter.
In June, Descartes bought BoxTop Technologies Ltd., a leading provider of shipment management solutions for small- to mid-sized logistics services providers (LSPs).
Based in Windsor, England, BoxTop helps LSPs digitize their operations and connect to the wider logistics community to manage the lifecycle of shipments. LSPs use the BoxTop platform to manage the secure and efficient movement of goods from quoting through to routing, booking and final delivery.
Descartes acquired BoxTop for approximately £10.25-million ($18.2-million), using cash on hand.
Dividend: Descartes does not pay a dividend.
Outlook: Good. The company continues to increase revenue and profits at a double-digit rate.
Action now: Buy.
Constellation Software Inc.
Recommended on Feb. 12, 2024 at $3,732.08. Closed July 12 at $4,147.15.
Ticker: CSU-T
Background: Constellation is a large tech company by Canadian standards with a market cap of about $88-billion. It was founded in 1995 to assemble a portfolio of vertical market software companies that had the potential to be leaders in their particular area of expertise. The company has grown rapidly through a combination of acquisitions and organic growth and continues to apply the same formula.
Performance: The shares continue to hit new all-time highs. The stock is up about 25 per cent year-to-date and shows a gain of 11 per cent since it was reinstated as a “buy” in February in the Internet Wealth Builder.
Recent developments: The company’s first-quarter results showed continued strong growth. Revenue increased 23 per cent to $2.35-billion compared with $1.92-billion in the first quarter of 2023. The increase is primarily attributable to growth from acquisitions as the company experienced organic growth of 4 per cent in the quarter.
Net income attributable to common shareholders was $105-million ($4.95 per diluted share), compared with $94-million ($4.44) in the prior year.
Free cash flow available to shareholders decreased $7-million to $446-million compared with $453-million for the same period in 2023.
Constellation continued its acquisition policy, spending $223-million on new purchases during the quarter. Deferred payments associated with these acquisitions have an estimated value of $65-million, resulting in total consideration of $288-million.
Dividend: The stock pays a quarterly dividend of $1 per share ($4 annually) to yield 0.14 per cent.
Outlook: The formula continues to work. There is no reason to believe it won’t continue to do so. But the shares are expensive at this level with a P/E ratio of 111.3.
Action now: Hold.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.
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