This High-Growth Stock Is Down 25%: Should You Buy?

The right time to buy a stock is at a dip and not when it rallies. Dye & Durham (TSX:DND) is a high-growth stock trading at a 25% discount.

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The stock market has turned from bearish to bullish as the seasonal rally kicks in. In this turn of events, a few high-growth stocks dipped significantly for company-specific reasons. One of these high-growth stocks is Dye & Durham (TSX:DND), the software company that stormed the market and gave handsome returns in a year. But now the stock is down 25%. Should you buy this dip? 

Many investors fear a dip because not all stocks rise from the decline. Investors should understand why the stock fell and how it impacted the company’s fundamentals and long-term growth potential. For instance, Air Canada stock fell over 65% in March 2020 because of the pandemic. The cause of the dip impacted its fundamentals and growth.

Dye & Durham stock fell 25% 

Dye & Durham is a cloud-based software offering information services and workflow to legal, government, and financial services firms. The critical nature of its services in a niche market makes the software sticky. Its clients are blue-chip firms, and top 100 accounts have an average contract of 16.6 years. This means regular and predictable cash flow. 

With such a robust clientele and earnings, Dye & Durham stock surged threefold in a year since its initial public offering (IPO) in July 2020. For a company with predictable cash flows, why did the stock fell 25%? 

The stock fell around 13% between July and September. That is normal for a high-growth stock because the overall market was slow at that time. Moreover, there was some insider selling. But the steep fall I am talking about came on October 7. It was from that day the stock fell almost 14%. There was significant selling activity, making the stock oversold. 

Why did Dye & Durham stock fell? 

This sudden sell-off came as Dye & Durham rejected a $2.8 billion buyout offer after careful consideration. It also formed a special committee to analyze the offer. The committee recommended going with the existing business strategy of growing through acquisitions rather than getting acquired. 

I was expecting a similar outcome. Think logically. Why would a company in the growth phase whose stock has touched a high of $53.68 go private for a $50.5/share offer? Mawer Investment Management, who owned about a 9% stake in Dye & Durham at that time, also opposed the idea of going private. 

Probably, the management firm that proposed the acquisition might have sold some or all of its shares in Dye & Durham after the latter rejected the offer. But this sell-off is temporary. 

Should you buy the dip? 

The dip is because of a rejected offer, which will not impact Dye & Durham’s contracts. The company will continue to acquire more companies and grow its client base. Its acquisition-driven business model targets companies with a strong client base and adjusted EBITDA. In its investor presentation, the company said that the acquisitions in the pipeline have worth over $500 million in adjusted EBITDA. 

It expects a fivefold growth in adjusted EBITDA from $36.7 million in fiscal 2020 to $200 million by fiscal 2022 through acquisition, integration, and operations. The company has exceeded its target adjusted EBITDA growth in the last three years (2019-2021). Even if I consider the company’s target as ambitious, there is no denying the company is growing fast. 

There is long-term growth potential in the stock. I don’t say Dye & Durham’s share will grow 200% in a year, but it can grow double-digit in the next five years. This is an opportunity to buy a high-growth stock at a significant discount. 

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.

Fool contributor Puja Tayal has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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