Tech stocks are renowned among investors for a few things: high growth, innovative platforms, market-moving mergers among them. But what tech stocks are not known for is their low valuation. Indeed, tech has a reputation for being expensive, and the following two TSX Index stocks are no exception. But are either of them worth the initial outlay? It’s time to crunch some numbers and find out.
Open Text (TSX: OTEX)(NASDAQ: OTEX)
Having recently hit a 52-week high, some analysts may be asking themselves whether to cash out of this industry favourite. One of the top Canadian tech stocks, Open Text has had a good year in terms of performance, with returns of 23.5% that beat the Canadian software industry average of 7.3% for the same period.
While the growth here hasn’t be overwhelmingly high, from a one-year past earnings increase of 21.4% to a meagre five-year average earnings growth of just 7%, a sizeable 30.7% annual growth in earnings is expected over the next one to three years. This alone makes Open Text a consideration for a growth investor bullish on Canadian tech.
For investors who like to see signs of improvement in a stock’s balance sheet, it’s worth pointing out that Open Text has managed to bring down its level of debt to net worth over the last five years from 85% to the current 68.2%. A further sign that shareholders’ money would be in good hands is that the average tenure for the board of directors exceeds 10 years, suggesting experience.
A popular stock that has gained 1.05% in the last five days, Open Text is also a low volatility purchase, with a beta of 0.54 relative to the TSX Index. A stock for value investors, though, Open Text is not: from a P/E of 38.9 times earnings to a P/B of 2.8 times book, this is overvaluation country. However, growth prospects and a dividend yield of 1.75% may be enough to pique a tech bull’s interest.
Constellation Software (TSX: CSU)
Diversified tech always sounds like a good idea, with the promise of some in-built defensiveness, but is this expensive stock worth the outlay? Another outperforming ticker, Constellation Software saw returns of 19.5% over the past 12 months, with a solid track record evident in its one- and five-year past earnings growth rates of 44.9% and 25.2%, respectively.
Mirroring Open Text, Constellation Software is expensive in the fundamentals, but less satisfactorily. A P/E of 48.3 times earnings is indeed high, but a P/B of 36.7 times book puts this stock in the no-go zone. A dividend yield of 0.46%, is too small to be tempting, while a 2.5% expected annual growth in earnings does nothing to improve the situation.
The bottom line
Open Text insiders have sold more shares than snapped them up in the past several months, and in considerable volumes, adding to the case for shorting. However, as we have seen above, this stock could have more upside yet to come, and shareholders have some passive income to enjoy while they hold on for the ride. Meanwhile, overvaluation and low growth make Constellation Software a potential stock to sell.
