Over the past five years, the S&P 500 and the TSX Technology Indexes have a CAGR of approximately 25%.
Tech companies, especially in Canada, are booming right now. Which is exactly why we decided to come out with this list of the best performing technology stocks in Canada.
Yes, the market is undergoing somewhat of a pullback in terms of Canadian tech stocks. However, when we saying booming, we're talking about the long term, as should be the mentality of most investors, especially those who are just learning how to buy stocks.
But even though it's booming, people usually head to the United States when looking for the best tech stocks to buy. So why is that?
Tech stocks just aren't as prevalent on the TSX
The IT sector accounts for over a quarter of the S&P 500.
Recently, the major indices underwent a sector reshuffle, however technology still accounts for 25.76% of the index. It is almost double that of the second largest sector.
However, Canadian stocks in the technology sector accounts for only a single digit weighting of the TSX Index.
As you can see, the lack of Tech-listed companies on the TSX has hampered the overall performance of the Canadian markets.
The good news? The lack of performance can lead to a lack of awareness. Thus, comes opportunity.
Even though the TSX’s IT sector is small, there are plenty of good investments.
The U.S. has its FAANG (Facebook, Amazon, Apple, Netflix, Google) stocks, but did you know Canada has its own acronym of tech all-stars?
Ryan Modesto, chief executive of 5i Research, coined the acronym “DOCKS” to reference Canada’s own FAANG stocks.
The five stocks include
- Descartes Systems
- Open Text
- Constellation Software
A well-balanced portfolio should have exposure to the IT sector and you don’t have to go south of the border with US tech stocks to find it.
What are the best tech stocks in Canada?
Going off the board with this pick, Nuvei (TSE:NVEI) is one of Canada’s newest IPOs.
The company went public in August and its share price has performed quite well.
As of writing, Nuvei’s share price is up by ~58% since September of 2020. Not a bad return for those who got in early.
Is the jump in price justified? When compare to the valuations that peers commanded, we felt that the company’s IPO pricing did not do the company justice.
As we discussed with Premium members, there was a price disconnect which offered an attractive risk to reward opportunity.
Prior to listing, Nuvei was the largest privately held fin-tech company in the country. The company provides payment-processing technology for merchants.
Their suite of products serves both online and in-store transactions and counts Stripe, Paypal, Fiserv, Lightspeed POS, Global Payments, Shift4 Payments and WorldPay among its competitors.
Since going public, the company has attracted plenty of attention. There are 13 analysts covering the company – 3 rate it a “buy”, 6 an "outperform" and 4 a “hold”.
Although the company is not yet profitable, the expectation is for the company to turn a profit in 2021. They also expect 26% average annual revenue growth over the next couple of years.
It is important to note, that newly listed companies carry additional risk.
Can it meet lofty estimates?
New listings are particularly vulnerable to performance as compared to expectations. Given this, IPOs such as Nuvei are most appropriate for investors with a higher risk profile.
Performance of Nuvei Vs TSX since its IPO
After several years in which it provided consistent and solid returns, Kinaxis’ (TSE:KXS) stock exploded in 2019 and continued its outperformance in 2020.
2021 however, much like most Canadian tech stocks, has been another story. However, Kinaxis is still a solid long term option.
In 2019, the company’s stock price jumped by 42%. It then went on to gain 80.30% in 2020. A 2021 pullback is not surprising, considering its run up.
In September of 2020, it was named to the TSX30 – a ranking of the top performing TSX-listed stocks over the past three years.
Kinaxis’ crown jewel is RapidResponse, a cloud-based subscription software for supply chain operations. Not surprisingly, demand for reliable supply chain management software is at an all-time high.
Globalized companies are dealing with complex issues, more so as COVID-19 mitigation efforts are impacting the supply chain in a big way.
Economic and border shutdowns are causing havoc, and platforms such as RapidResponse are essential in minimizing supply chain disruptions.
On the flip side, the pandemic has negatively impacted legacy customers. Some have been unable to renew contracts, or deferred projects. The good news is that the company is winning more business than it is losing.
One of the previous knocks on the company was the lack of diversification. But, the company is currently working hard to reduce this.
Although performance over the last few years has been impressive, the company has one of the lower expected growth rates on this list. Over the next couple of years, the company is expected to grow revenue and earnings by the high teens.
Given this, its not surprising it has pulled back. This is not a stock that should be trading at the same levels as hyper-growth stocks which are generating growth of 50% annually.
5 year performance of Kinaxis vs TSX
Much like Kinaxis, Descartes (TSE:DSG) is benefiting from a complex and globalized supply chain. Descartes is a global provider of federated network and global logistics technology solutions.
It provides a full range of logistic and network solutions that connects trading partners. Descartes has more than 20K customers across 160+ countries.
Descartes operates the world’s largest multi-modal and neutral logistics network with high profile partners including UPS, Home Depot and Air Canada to name a few.
As governments worldwide face the prospects of additional shutdowns, logistics are of the utmost importance. The company’s addressable market is estimated to be worth more than US$4 trillion.
In terms of reliability, Descartes has been one of the most consistent tech stocks on the TSX Index. Over the past five-years years, the company has grown earnings at a rate of 13.78% annually and over that time, the stock has returned more than 208.5%.
What can investors expect moving forward? Much of the same.
Analysts expect the company to grow earnings by approximately 19% annually over the next couple of years.
The company is laser focused on the higher-margin service revenues and on transitioning existing clients from its legacy license-based structure to its services-based structure.
Furthermore, the company is a serial acquirer. Since 2014, the company has closed on 24 acquisitions for total considerations of ~$US820 million.
Despite a challenging environment in 2020, in early November of 2020 it announced the acquisition of ShipTrack for $25 million, its third acquisition of the year.
5 year performance of Descartes vs TSX
Enghouse Systems (TSE:ENGH)
Arguably the most underrated stock on this list, Enghouse Systems (TSE:ENGH) has ben among the top performing technology stocks for the past decade.
The company is one of the least-followed and known on this list, yet it has quietly outperformed some of the bigger names.
It develops enterprise software solutions for a range of vertical markets. It has benefited from the current pandemic in that it specializes on ERP solutions for remote work.
Given many companies have now made work from home a permanent option for staff, Enghouse is ideally situated to benefit.
The company’s stock price has grown by 156% over the last 5 years (including dividends) and one important thing to note is pandemic or not, Enghouse continuously delivers.
The company has also been named to the TSX30, highlighting its strong performance over the last while.
Let’s put Enghouse’s long-term performance into further perspective.
A $10,000 investment in the company a decade ago would be worth more than $151K today. This is equal to a normalized return of 1,420%. The company has simply been a star.
Increasing Enghouse’s attractiveness, it is also one of the few tech-listed Canadian Dividend Aristocrats. After raising the dividend by 23% at the start of the pandemic, the company also issued a special dividend of $1.50 a share to end 2020.
It then went on to raise the dividend yet again in early 2021. This type of growth on the dividend end is a rarity when it comes to tech stocks.
Enghouse is uniquely positioned as a growth and income stock, a rarity in the tech industry.
Although the company trades at expensive valuations – it always has and given its strong performance, is deserving of a premium.
5 year performance of Enghouse vs TSX
What more can be said about Shopify (TSE:SHOP) that hasn’t already been said.
It has been among our top tech stocks for years and is likely to go down as one of the (if not THE) most successful IPO’s this country has ever seen.
Since it went public in 2015, the company has returned 4,180%! A $10,000 investment in the company would be worth $428K today.
We’ve mentioned the TSX30 a couple of times already. Can you guess which stock has topped the list?
Of course you can – Shopify is #1 with returns of 632% over the past three years – more than double the second-best performing company.
The pandemic has accelerated the adoption of e-commerce which has benefited Shopify in a big way.
Earlier in the pandemic, Shopify announced that it was generating Black Friday level sales on its platform.
The company has more than doubled gross merchant volumes YOY and revenue has also grown at a torrid pace.
It has also allowed them to turn a profit, a notable achievement for a company that has not yet been able to generate positive earnings consistently.
Although recent price activity has been choppy, Shopify’s stock price is still up by 110% over the last year. Once again, this places the company among the best performing stocks on the TSX Index.
If you are worried you missed out, consider jumping into the stock when it consolidates or when it drops by 20% or more.
The stock does have a history of being quite volatile, and these types of moves happen at least a few times a year. Each time it has proven to be a buying opportunity. Interested in a little more stability rather than growth? Check out the top Canadian telecoms stocks.