As we look back on the first half of the year, growth stocks once again rule the day. At the forefront of out-sized returns – the technology industry. As has been the case in recent years, the TSX Capped Technology Index is crushing the TSX Composite Index.
Year to date, the Tech Index is up 48% and on average, has posted annual gains of 24% over the past five years. In comparison, the TSX Index is up 17% thus far, but has only averaged 4.8% annual growth over the past five years.
Near the end of 2018, I brought to investors attention the top performing and the best valued tech stocks to buy going into 2019. Both, Shopify (TSX:SHOP)(NYSE:SHOP) and Open Text (TSX:OTEX)(NASDAQ:OTEX) are among the top three performing stocks in 2019. The third, the Descartes Systems Group (TSX:DSG)(NASDAQ:DSGX) is one that I wrote about back in September of last year. At the time, it was also one of the best performing technology stocks of 2018. It’s a trend that has continued.
The question is, are these three still buys today?
Gold Star – Shopify
Shopify once again finds itself at the top of the list and there appears to be no stopping the company. Year to date, its stock has shot up 126% far outpacing the industry average.
It remains Canada’s tech darling, and there is no reason to expect the company to slow down. Analysts expect the company to post approximately 50% average annual earnings growth over the next five years, which is tops in the industry.
Can it achieve these lofty goals? History is certainly on its side. Since going public, the company has never missed earnings’ estimates. In fact, it has beat on both the top and bottom lines every quarter.
Silver Star – Descartes Systems Group
Coming in at number two, Descartes Group has built off strong momentum from last year. Through the first six months of the year, the company’s stock price is up 42%.
Over the next five years, earnings are expected to rise by an average of 20% annually — second only to Canada’s top tech stock: Shopify. Despite what appears to be expensive valuations, analysts are still very bullish on the company, with 10 rating it a “buy.”
Bronze Star – Open Text
Open Text had a difficult fall last year and as a result, downward pressure caused its stock to become one of the cheapest in the industry. It’s therefore not surprising to see it rebound in 2019 as it is up 30% thus far.
Trading near 52-week highs, you might be surprised to know that it is still one of the best valued technology stocks. It is trading at a cheap 14.25 times forward earnings and with a P/E to growth (PEG) ratio below one (0.42). As such, it can be considered undervalued, as its stock price is not keeping up with expected growth rates.
Foolish takeaway
Despite the fact that all three have seen significant gains, expect them to continue to outperform. Shopify and Descartes offer some of the best growth rates on the TSX and Open Text is still an excellent value play. Although volatile, the overall market is still in an uptrend and all three will continue their upward trajectory.
On the flip side, if you expect a market crash, I’d be weary of investing in Shopify and Descartes. Given their high valuations, they will most likely underperform in a bear market.
