With stocks soaring, the Canadian stock market seems to be on another bull run. However, the index certainly isn’t reflecting this. The S&P/TSX Composite index is up just 8.5% from its recent lows in October 2022. To be an official bull market, the index needs to climb 20% or more from its recent low.
Energy and financial stocks are dragging the index lower, but tech stocks could be the catalyst for the next bull run. Here are the top two growth stocks that should be on your watch list as the market strongly rebounds.
Constellation Software
Enterprise software giant Constellation Software (TSX: CSU) is my favourite Canadian tech stock. Over the past three decades, this company has accumulated over 300 small- and mid-sized software firms focused on specific niche sectors. That’s helped create immense wealth for early investors.
Last year, the team doubled-down on its acquisition spree. Valuations across the private tech sector are low, which means there’s plenty of opportunities for a mega-acquirer like Constellation to snap up attractive deals. I believe these recent purchases are already boosting the company’s earnings.
Constellation’s revenue was up 34% in the most recent quarter. Organic growth, adjusted for currency fluctuations, was just 5% during this period. So the majority of the company’s earnings growth was led by new company acquisitions. That’s typical for Constellation.
Meanwhile, free cash flow (FCF) available to shareholders also had strong growth during this quarter. FCF was up 39.8% in the first three months of this fiscal year. At that pace, the company’s FCF could double within three years.
Assuming the company generates $2.7 billion in free cash flow this year, the stock is trading at a price-to-FCF ratio of 21. That’s fair value for a growth stock of this caliber. Keep an eye on it.
Neighbourly Pharmacy
Toronto-based Neighbourly Pharmacy (TSX: NBLY) is a new growth stock on the market. The company went public in 2021 and the stock has declined 25% since then. However, its underlying business seems to be expanding rapidly. Revenue is growing while the company accelerates its growth-via-acquisitions strategy.
Neighbourly operates a network of pharmacies across Canada. The network includes 291 privately owned pharmacies, many of which were purchased last year. The company delivered revenue growth of 40% and 75% in each of the past two fiscal years. Simply put, its accelerating pace of acquisitions is being reflected in the annual earnings reports.
The management team believes there could be another 3,500 pharmacy locations on its radar for potential acquisitions. Even a fraction of that could boost the company’s expansive network in the next few years, boosting revenue and earnings potential.
As the company continues its path to consolidate Canada’s pharma network, investors could see wealth creation over time. Keep an eye on this relatively underrated growth stock.
