Being in a 7-month market correction, there will undoubtedly be strong Canadian stocks, particularly growth stocks, trading at a discount to what they should be.
During a major market correction, panic tends to set in, and investors sometimes sell off what they feel are "higher risk" stocks and stick to defensive options such as Canada's top agriculture stocks. However, many approach this with the wrong mentality. The reality is that as the price of stocks goes down, so does the risk of investing in stocks. As prices rise, the risk of investing in stocks goes up.
However, human emotions can get the best of us, and we tend to sell stocks while they're down and buy them while they're up. In this article, I'm going to try and get you to kick that habit by presenting 2 top Canadian growth stocks that I feel are undervalued at the time of writing.
Lightspeed Commerce (TSE:LSPD)
Lightspeed Commerce (TSE:LSPD) provides an omnichannel commerce-enabling SaaS platform. Its software platform provides customers with the functionality they need to engage with consumers, manage their operations, accept payments, and grow their businesses. The company sells its platform through a direct sales force in the United States, Canada, Netherlands, Australia, and other countries. It derives a majority of its revenue from the United States.
Did Lightspeed potentially get ahead of itself in late 2021 when it soared over the $150 mark? Likely. However, don't let a dropping chart and negative sentiment cloud the fact that this is still an outstanding company growing at a pretty rapid clip.
One of Lightspeed's most prominent criticisms is that it can only grow via acquisition. However, the last few quarters have put the rumour to bed, as the company is still putting up strong organic growth. Overall, the company hopes to grow at a 30% annual clip for the next few years, and if it can do this, its shares are likely discounted right now.
The company's expansion into new verticals like tee time bookings for golf, the continued uptake for platforms like Lightspeed Payments, and the continued growth of its partnership with OpenTable have allowed it to grow not only its exposure in the restaurant sector but the small to the medium business sector as well.
The company is currently not profitable, so the best valuation metric, in our opinion, is the enterprise value to sales ratio. At this point, Lightspeed is trading at only 4.2X EV/Sales. To get a ballpark of where this is, the industry average currently sits at 6.6, and one of its major competitors, Shopify (TSE:SHOP), is trading at nearly double this, despite growing at a slower pace.
The stock is high-risk, with a beta suggesting it is significantly more volatile than the broader market. If consumer spending slows and the economy does enter a recession, Lightspeed's share price will be rocky. However, we feel there are already a lot of recession fears priced into the stock at this point.
Another payment processor, Nuvei (TSE:NVEI), is currently sitting on significant year-to-date losses of over 44%. However, the selloff is likely overdone, as the company is trading below its January 2021 IPO price.
Nuvei Corp is a provider of payment technology solutions to merchants and partners. The solutions provided are mobile payments, online payments, and In-store payments. Its geographical segments are North America, Europe, the Middle East, Africa, Latin America, and the Asia Pacific. The vast majority of its revenue is generated from North America and EMEA.
There's one key difference between Nuvei and Lightspeed, and that is the fact that Nuvei is profitable at this time. It is more of a pure-play payment processor than Lightspeed, but the profitability paints an overall picture of its undervaluation in a much better light.
The company is trading at only 13.5 times forward earnings and 21 times trailing free cash flows. 21X cash flow is a relatively high price to pay for most companies. However, when you consider that Nuvei has been growing cash flow and is expected to continue doing so in the future at a rapid clip, it becomes an easier pill to swallow.
The company has a price-to-earnings-to-growth ratio of only 0.10, suggesting there is virtually no forward-looking growth priced into the company at this point. With a low PEG, there is a buffer here if the recession impacted Nuvei to the point where consumers were spending less. I feel it is already priced in at this point.
Overall, long-term investors could be rewarded with a buy and hold strategy here
Although these companies still have the potential to undergo more pricing corrections, they are strong when we look at the long-term prospects of both companies. If the economy were to enter a recession, it could be short-lived, and if the strength of the consumers returned, we'd see considerable upside in both these companies.