The TSX Composite has provided lackluster returns for investors over the last five years, and a lot of them are heading south of the border to invest in U.S. equities to keep up. However, Canadian investors looking for outsized growth should look at one sector in particular. The Canadian tech sector.
Shopify (SHOP.TO) has been a pinnacle of growth for Canadians. The stock has returned over 1000% to investors since its 2015 IPO and has increased nearly 150% in 2019 alone. However, the stock is reaching pricing levels that are making investors hesitant, and for good reason.
A growth stock’s price relies heavily on the company’s ability to put forward strong earnings reports. If Shopify were to have a poor quarter, it could send the stocks price into a free fall. Any company that has gained the ground Shopify has over the last 6 months should be looked at with extreme caution.
So, if you’re looking to get into the Canadian tech sector and soak up some of its outsized returns, you can either invest in Shopify or take a look at these two promising stocks.
CGI Group (GIB-A.TO)
CGI Group (TSX:GIB-A) is an IT company that provides a wide portfolio of IT solutions for businesses including consulting, outsourcing services and property solutions.
The company has a strong history of revenue growth. Over the last 5 years, CGI Group has grown revenue by 9.5% annually, and has a compound annual growth rate of over 19%. Because the company doesn’t sell physical products and instead sells services, it is heavily reliant on contracts. As such, it is important to look at the company’s backlog and book to bill ratio.
The company built its backlog by $897.9 million in the second quarter of 2019 to reach a total of $22.9 billion. The company also has a book to bill ratio of 106.1%, suggesting there is more demand than supply for its services.
CGI Group has a long term goal to double in size over the next 5 years, and with a CAGR of 19% it looks as though it may be able to achieve this. The company has met or exceeded earnings expectations in each of the last 5 quarters, and in terms of revenue has met analyst expectations in 4 of the last 5. Its only miss came in June of 2018, where it missed revenue targets by a mere 1.48%.
CGI Group is trading at a heavy discount relative to its peers. With forward price to earnings at 19.69 and a price to book of 3.99, it is one of the cheaper stocks you’ll find in the Canadian tech industry. With a 2 year PEG of 2.27, there seems to be a lot of growth already priced into the stock, but if the company can continue growing at its current pace, I wouldn’t be worried.
Opentext (TSX:OTEX) is another software development company that specializes in providing EIM (Information Management Software.)
The company is a leader in an industry that is growing at an exponential rate. Data services are becoming increasingly more popular, and for businesses it will soon become a necessity, not a luxury, to use them.
The company recently added to its partnership with Google’s cloud division, which is a huge step forward. OpenText’s applications will now be available on Google’s could platform, and popular applications like Google Drive and Google Sheets will now make use of OpenText’s enterprise software. The company also recently partnered with Mastercard to increase the efficiencies of the payment and financing methods in the automotive industry.
As a company that drives growth through acquisitions, these are both two huge steps forward. Opentext has spent over $2.2 billion on acquisitions over the last 3 years, and will more than likely continue to do so in the future. The tech industry is highly competitive and stretched fairly thin. This can pose significant risks to those companies who need to drive growth through acquisition, as the lack of purchasable assets can drive prices higher through bidding competition. So, the company will need to be prudent in its spending habits.
Opentext has beat earnings estimates for four straight quarters, and has provided better than expected sales in two of the four. Investors have feared slowing growth from the Canadian tech company. However, its recent partnerships with Mastercard and Google, plus its recent acquisitions of Liason in December of 2018 and Catalyst Reository Systems in January of 2019 shows the company is still pushing forward in terms of growth.
Opentext has a two year PEG of 0.43, which suggests there is a significant amount of growth not priced into this stock yet. Trading at a forward price to earnings of only 14.26 and a price to book of 2.97, in relation to its peers, Opentext is one of the cheapest technology stocks you can get your hands on today.
The company pays a dividend of 1.66% at the time of writing. And although this seems low, the dividend has plenty of room for growth. The company’s dividend makes up only 21 percent of free cash flows. Couple this with a 6 year dividend growth streak and a 5 year dividend growth rate of over 21 percent and it becomes a lot more promising.