2020 New Year: A Canada Stock Market Comparison

Ring in the next decade with top Canada technology stocks like Open Text (TSX:OTEX)(NASDAQ:OTEX) for the 2020 New Year.

| More on:
Man holding magnifying glass over a document

Image source: Getty Images.

Instead of investing in the overpriced Shopify stock, Canadian stock market investors should purchase shares in Kinaxis (TSX:KXS) and Open Text (TSX:OTEX)(NASDAQ:OTEX) for the 2020 New Year.

Whereas Shopify is expensive and in a low-margin industry, Kinaxis and Open Text boast larger profit margins in a high-growth technology vertical. Because labour is still relatively scarce in cloud technology and data science, fewer companies can compete against each other to build top data analytics software than if there were a higher supply of skilled labour. 

Less competition means higher profit margins for the companies that do take off from conception to reality. Given that Shopify reports a profit margin of negative 8.97%, Open Text and Kinaxis are much better investments. 

Cloud-based enterprise data analytics are taking off with the popularity of machine learning and coding boot camps. Education is increasingly putting out the skilled labour necessary to build the software. At the same time, companies are demanding data analytics software that is easier to learn and use. 

The better 2020 stock market buy 

Open Text reports a higher levered free cash flow (FCF) than Kinaxis. Levered FCF is the earnings remaining for shareholders after the company pays debt financing costs. While Kinaxis reports a levered FCF of $27.5 million, Open Text boasts a levered FCF of $745 million. 

Open Text is overall more profitable on multiple measures than Kinaxis. Overall, Open Text is a more efficient operation than Kinaxis with higher quarterly earnings growth. Since last year, Open Text earnings have grown by 104% — 34.7% more than earnings growth at Kinaxis.  

Open Text is also the more affordable option at $56.91 per share; Kinaxis sells for a much higher $104.24 per share. Going into November, the price on Kinaxis stock surged by over $20 per share, but it isn’t clear if the stock can maintain that market value. 

The stock market responds to government contracts

Kinaxis may be able to hold its valuation for one reason: government contracts. Dependable business relationships give stocks higher market values than what objective financial data would imply. 

Kinaxis software helps enterprises manage global supply chain operations throughout the United States, Europe, Asia, and Canada. In light of the Huawei scandal, supply chain security is becoming more crucial for world governments. Kinaxis is in an excellent position to exploit the Huawei scandal to improve Canada’s net export position.

In particular, Kinaxis works for the aerospace and defence industry, which is willing to spend a lot of money to protect the supply chain from espionage activity. Government contracts mean that Kinaxis can support a higher stock market value than the typical software company. 

Reliable dividends signal great stock market buys

Kinaxis is indeed a crucial asset for the Canadian government and our allies to manage global supply chain threats effectively. Nevertheless, Open Text is less expensive and issues a stable 1.63% dividend to shareholders. Kinaxis could keep surging in the next decade, but Open Text is the better value buy for Canadian investors saving for retirement.

Open Text may not be involved in a niche government vertical like supply chain management in aerospace and defence. Still, it boasts partnerships with many top global technology firms, including Microsoft and Oracle. Moreover,  although the price-to-earnings (P/E) ratio on Kinaxis stock is an expensive 151, the price on Open Text is only 47 times earnings.

Typically, investors consider P/E ratios over 20 to be overpriced, but technology stocks tend to have higher P/E ratios. Every stock has the right investor. Aspiring retirees may prefer a long-term investment in Open Text, while Kinaxis’s expensive valuation may be better suited for big institutions. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Fool contributor Debra Ray has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Microsoft. The Motley Fool recommends KINAXIS INC, Open Text, and OPEN TEXT CORP and recommends the following options: long January 2021 $85 calls on Microsoft.

More on Dividend Stocks

A worker uses a double monitor computer screen in an office.
Dividend Stocks

2 of the Best Canadian Stocks That Pay Out Monthly

These two Canadian dividend stocks are some of the best to buy, offering yields upwards of 5.4% and returning cash…

Read more »

Various Canadian dollars in gray pants pocket
Dividend Stocks

Passive-Income Seekers: 4 Safe Dividend Stocks to Own Beyond 2033

Dividend stocks are great, but only if they continue to perform after downturns as well. In the case of these…

Read more »

clock time
Dividend Stocks

How Investors Can Build a $1 Million Portfolio in 12 Years

If you can handle it, you can certainly create a million-dollar portfolio in just 12 years, especially considering this dividend…

Read more »

A close up image of Canadian $20 Dollar bills
Dividend Stocks

4 Big Dividend-Paying Stocks for 2023

These four stocks all earn strong cash flow and offer attractive dividend yields, making them some of the best to…

Read more »

grow dividends
Dividend Stocks

This 7.5 Percent Dividend Stock Pays Cash Every Month

If you need cash now, this dividend stock is certainly one I would consider that could double in share price…

Read more »

Path to retirement
Dividend Stocks

Need Passive Income? Turn $6,000 Into $106 Every Month

Find the right dividend stock for stable growth and you can turn $6,000 into $106 each month!

Read more »

Silver coins fall into a piggy bank.
Dividend Stocks

2 Top Stocks to Supercharge Your TFSA Into a Cash Cow

IA Financial and Brookfield Renewable Partners are great passive income generators for new TFSA investors.

Read more »

edit Real Estate Investment Trust REIT on double exsposure business background.
Dividend Stocks

Invest in This 7.5% Dividend Stock for Passive Income

This dividend stock could provide you with double the amount of annual passive income by investing now instead of at…

Read more »