Growth stocks have seen an uptick this year, mainly due to the signs of easing inflation and slowing rate hikes. TSX tech names have rallied 24% this year, beating the TSX Composite Index by a large margin. However, they have largely been out of favour since late-2021 and have seen terrible drawdowns. This is quite evident for growth stocks amid the rising rate environment. That’s because higher rates lower the present value of future cash flows, making them less valuable.
TSX tech stocks: Consistent profitability
But some growth stocks consistently outperform broader markets, irrespective of the macroeconomic environment. Constellation Software (TSX: CSU) is one such example. Thanks to its unique business model and consistent profitability, Constellation has notably outperformed its peers. In the last 12 months, CSU stock has returned 30%, more than double that of TSX tech stocks. In the last decade, it returned 2,000%, far outperforming the index.
Constellation Software is not a run-of-the-mill information technology company. It acquires small vertical market software companies with leadership positions in their respective domains. Constellation acts as an umbrella company and expands its portfolio, catering to a wide array of private and public sector customers. Its free cash flows derived from the existing portfolio of companies are used to finance further acquisitions.
A constantly expanding addressable market and above-average earnings growth have created massive shareholder value in the last decade. Constellation’s earnings have grown 20% compounded annually in the same period. Its operating margins have been quite stable at around 20%, regardless of broader market woes, indicating high earnings quality. The management has displayed an efficient use of capital, highlighted by its average return on capital of 30% for the last 10 years.
Constellation’s strong balance sheet and the management’s knack for inorganic growth will likely create value in the long term. Many high-growth tech companies halved in value amid the tech rout since last year. However, CSU has been resilient and kept outperforming. Its premium valuation throughout the recent bear cycle speaks for its business strength and differentiated market position.
The Canadian energy sector seems in great shape
Another name that seems like a worthy growth bet is Tourmaline Oil (TSX: TOU), Canada’s biggest natural gas producer. While it has been on a notable downtrend since mid-2022, it offers handsome growth prospects for long-term investors.
Thanks to higher gas prices since the pandemic, Tourmaline Oil has seen its free cash flows grow by a 720% CAGR in the last two years. It produces natural gas from the highly prolific Montney and Alberta Deep Basin reserves and sells it in the premium-priced markets in California. Although gas prices are lower currently, they will likely increase later this year due to higher demand.
Tourmaline saw immense improvement in its balance sheet as it repaid billions in debt in the last two years. Now that the debt has been largely paid, the company might prefer to distribute higher cash to shareholder returns in 2023. It paid $7.9 per share in dividends last year. This year as well, Tourmaline seems well placed to delight investors with its handsome dividends.
TOU stock has returned -6% in the last 12 months and 780% in the last three years. It is currently trading at a premium valuation compared to peers, indicating higher growth expectations.
