Tech stocks have had a strong recovery in 2023. However, there are signs that the economy is slowing. The investment cycle is declining, and businesses’ decisions to invest in technology, innovation, and scale are being prolonged.
As a result, investors need to be very cautious with high-flying tech stocks that are growing fast but not profitably. Businesses that cannot generate profits in good times are very unlikely to become profitable/cash flow positive in weaker times. As a result, valuations and froth around those stocks can decline very, very quickly.
Fortunately, there are several great Canadian tech stocks that are growing but also growing profitably. They are not always cheap, but sometimes you can pick them up at decent valuations when the market pulls back. If you are looking for some great quality Canadian tech stocks, here are three I would buy on a decent pullback.
A tech stock with 1,000 businesses
While Constellation Software (TSX: CSU) is considered a technology stock, it might be better considered a “capital-allocation” stock. The company has acquired more than 1,000 different software businesses with a plethora of niche applications across the world.
Constellation’s businesses are not flashy with large total addressable markets (TAMs). Rather, they provide very niche services that tend to be affordable and economically essential to their customers.
It can generally acquire these small businesses at very cheap prices. As a result, it can earn very high returns on the capital it invests. When combined, these businesses tend to generate a lot of excess cash. Constellation takes that cash and then re-invests it into more niche businesses.
It is a great formula for compounding value for shareholders. Constellation is not a glitzy tech stock, but it has delivered incredible +35% annualized returns over the past 10 years. While the stock is not cheap today (it is never cheap), any pullback on fears of a recession would be a great buying opportunity.
A crucial tech stock for the transportation industry
If you want an intriguing tech stock focused on a specific industry, Descartes Systems (TSX: DSG) is an under-followed technology stock. Descartes operates a leading transportation connectivity network alongside a wide array of logistics/transportation software solutions. Its solutions help make the transport industry safe, more efficient, and more profitable.
A large mix of Descartes’s revenues is recurring. It is very profitable and earns high +20% net income margins. It consistently generates a lot of spare cash.
Like Constellation, Descartes has been very acquisitive. While its business may take a dip during a transportation recession, it should be able to deploy its $175 million of net cash into attractively priced acquisitions.
Given its high-quality business, Descartes is always a pricey stock. However, if this stock sees further weakness, it could be a great acquisition for a longer-term tech investor.
Heavy-duty, all-terrain innovation
If you are looking for a cheap, non-traditional technology stock, you may want to look at BRP (TSX: DOO). While BRP makes watercraft and all-terrain vehicles, it is one of Canada’s most innovative companies. It has taken traditional recreational vehicles and made completely new product categories (like the Sea-Doo Switch pontoon boat or the Can-Am Spyder three-wheel motorcycle).
It plans to release a new electric motorbike next year. Likewise, it plans to launch several new electric vehicles in the coming years.
The company has grown net earnings per share by a nearly 38% compounded annual growth rate for the past five years. Yet, it only trades for a minuscule 8.8 times earnings.
This company has bought back close to 5% of its stock annually. While a recession may weigh on its results, its innovative culture, strong brands, and great products should support growing earnings for many years to come.
