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You can’t always believe everything you see. For example, sub-indexes 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 sub-index. Based on the year-to-date gain of only 6.1%, 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. (TSX: SHOP), which is off 4.8% 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. (TSX: CLS). We recommended it in my Internet Wealth Builder newsletter in November 2023 at $38.46 and advised taking half profits in June at $71.19 for a gain of 98% in seven months. The shares are closed July 12 at $81.01, up 109% 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. (TSX: DSG) provides on-demand, software-as-a-service solutions 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, Ontario, and Descartes has offices and partners around the world.
The company recently released first quarter results for fiscal 2025, for the three months to April 30. Revenues were $151.3 million, up 11% from $136.6 million in the first quarter last year and up 2% from $148.2 million in the previous quarter. Note that the company reports in U.S. dollars. Net income was $34.7 million ($0.40 per diluted share), up 18% from $29.4 million ($0.34 per share) last year. Net income as a percentage of revenues was 23%, compared with 22% a year ago. Descartes does not pay a dividend.
Descartes’ share price is up 20% year to date to Aug. 14.
“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,” said CEO Edward J. Ryan. “Our technology solutions are designed to help shippers, carriers, and logistics services providers manage this dynamic complexity.”
Descartes grows its business both organically and through acquisitions. It added two new companies in the quarter. On March 28, Descartes acquired 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 Aerospace Software Development, 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’ fiscal 2025 fourth quarter.
In a £10.25 million (US$13 million) deal in June, Descartes bought U.K.-based BoxTop Technologies Limited, a leading provider of shipment management solutions for small- to mid-sized logistics services providers (LSPs).
The company continues to increase revenue and profits at a double-digit rate, and is worth considering for more aggressive portfolios.
Constellation Software Inc. (TSX: CSU) 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.
The shares recently hit new all-time highs and are up about 27% year-to-date to Aug. 14.
The company’s first quarter results showed continued strong growth. Revenue increased 23%, 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% in the quarter. Net income attributable to common shareholders was $105 million ($4.95 per diluted share), compared with $94 million ($4.44 per share) 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.
The stock pays a quarterly dividend of $1 per share ($4 annually) to yield 0.1%.
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.
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. The shares are worth watching but not acquiring at the current price.
Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website.
Follow Gordon Pape on X at X.com/GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney.
Notes and Disclaimer
Content © 2024 by Gordon Pape Enterprises. All rights reserved. Reprinted with permission. The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.
Image: iStock.com/peshkov
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