There are more than a handful of hot Canadian stocks that are off to the races going into the midpoint of 2023. Indeed, valuations on such names may not be as great as they were to start the year. Still, I believe that investors shouldn’t dismiss stocks that are up a great deal on the year as overvalued, overdue for a pullback, or a tad on the bubbly side.
Chasing hot stocks can result in a great deal of pain. Just ask any investor who bought tech stocks in the back half of 2021. Though the painful lessons from the market selloff of 2022 are still remembered, there are some that may, once again, be drawn in by momentum in specific stocks or market trends.
Remember, chasing trends and momentum is no formula for success over the long run. If you’re not careful and don’t put in quite enough due diligence, you could very well lose money, lots of money, and in a hurry. So, unless you can appropriately evaluate a company and its cash flows, it may be best to just let the traders trade, as you look to invest wisely over the long term.
In this piece, we’ll briefly go over three hot Canadian stocks at or around their all-time highs but have modest valuations that leave more room for further upside.
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Alimentation Couche-Tard
Alimentation Couche-Tard (TSX:ATD) is an earnings grower that not even recent recession fears can derail. The company recently delivered a phenomenal quarter, thanks in part to a series of impressive deals. The growth-by-acquisition story is still in full swing, even as the market cap blasts past the $65 billion mark. The company has found a growth formula that works, and I believe the stock is well supported by very strong cash flows and a robust fundamental story.
Just because Couche-Tard is getting more mature does not mean it can’t keep up the impressive pace of growth. The global convenience store market has plenty of potential takeover targets. If the right deal comes along, look for Couche to do what it does best: pay three quarters to get a full dollar, so to speak.
It’s Couche’s disciplined value and synergy-seeking approach that will probably lead the stock to move steadily higher year after year, goods times and bad.
At writing, the stock trades at 16.7 times trailing price to earnings. As earnings keep surging higher, look for the price to follow suit. Further, I think a great deal of multiple expansion may be in the cards as well. The company’s balance sheet looks incredibly impressive in this high-rate environment.
Constellation Software
Constellation Software (TSX:CSU) is quite the rare breed these days — a TSX tech stock that’s at fresh all-time highs. Despite eclipsing new heights, I remain bullish on the name at north of $2,600 per share. Why? The company continues to make remarkable deals in areas where management sees value. Indeed, Constellation is like the Couche-Tard of the Canadian software industry.
If it sees value to be had, it’ll act. Otherwise, it has other ways to make earnings move upward. Of late, the company has been wheeling and dealing. With tech valuations at modest levels, look for CSU stock to rise, as management spots better deals across its circle of competence.
