The Nasdaq Composite Index is down 28%, and the iShares S&P/TSX Capped Information Tech Idx ETF (TSX:XIT) is down 40% year to date. The tech stock meltdown is here, as investors sell their high-risk growth stocks amid fears of a recession. Hedge funds were the first to sell, and retail investors followed. Are you thinking of selling your tech stocks just because the price is falling? Stop right there.
“If a business does well, the stock eventually follows.”Warren Buffett
Two tech stocks to buy the dip
Here are two enterprise software stocks with diversified customer bases and resilient business models for risk-averse investors.
Descartes stock fell 23% year to date, outperforming Nasdaq and XIT ETF. It outperformed the tech index due to its resilient business model of supply chain management. Descartes customers vary from airlines to industrial to e-commerce.
The Russia-Ukraine war has disrupted the global supply chain, and many companies are looking for alternate suppliers. This has dented Descartes’s operations in the short term. But it has created a long-term opportunity. A shift in the global supply chain calls for re-optimization. Airlines are re-routing their flights, and suppliers are re-documenting. A supply shortage of various raw materials has created a significant order backlog. All the above factors have delayed growth, and the slowing economy has pulled down the stock. This is a good time to buy this growth stock at the dip.
Descartes has an asset-light model. It doesn’t provide logistics services but helps in transport management. Hence, it is not directly impacted by high oil prices. Its $213.4 million cash reserve can help it survive an economic downturn. The sanctions on Russia could drive demand for Descartes solutions like denied party screening, foreign trade zone management, and export compliance.
Descartes stock fell during the United States-China trade war and the pandemic but bounced back at a higher rate. If you invested in Descartes stock in the trade war or pandemic dip, your money would have surged 50% in five months. The looming recession could take longer to recover, so a 50% return in five months might not be possible. Depending on the severity of the recession, it could take 12-36 months to recover. Buy Descartes stock now and hold it for three years to enjoy 50-70% returns.
My second pick is another resilient tech giant, Constellation Software, the private equity firm of small software companies. Like Descartes, Constellation has a vast consumer base across different verticals. But it goes a step further and offers diversified software offerings. As an umbrella company, it has several subsidiaries. Last year, it spun off its subsidiary Topicus into a publicly traded company.
Customer diversification gives Constellation a cushion against sectoral weakness. The mission-critical nature of its solutions cushions it against economic weakness. In the first quarter, Constellation’s revenue surged 22%, and cash flow surged 1%. The company continued with its acquisitions. The bearish stock market allows Constellation to acquire companies at attractive valuations.
The stock has dipped 18% year to date to July 2021 level. Now is the time to buy the stock, as it falls under tech stock meltdown while its fundamentals remain intact.
Foolish way to make the most of the tech meltdown
At Motley Fool Canada, we encourage investors to make informed decisions rather than hasty decisions. The macro-economic weakness is putting pressure on the stock market, which is causing the selloff in fundamentally strong stocks. This is the time to buy the dip. Now, you can’t say with accuracy when the stock would rally. But you can make a calculated estimate of the returns from their fundamentals. I expect a 50-70% jump in Descartes and a 15-18% in Constellation. Once these stocks reach this level, I will revisit the economic scenario to see if there is more upside or is it time to book profit.