Do you have a stock on your watchlist you’ve been watching for over a year and kept waiting for a dip that never came? When you look at the stock price today, do you regret not buying it earlier? In investing, time is money. Nobody can time the market. While there are stocks you likely bought as they rallied that have burned your pockets, there are also stocks you missed making profits on by waiting to buy.
Many investors fear tech stocks, such as Lightspeed Commerce or Nuvei, because of the deep losses they have for buying at their peak. But not all tech stocks are the same.
How to identify an evergreen growth stock
Remember, any stock that surges way too high in a short time could be in a bubble. A surge of 100% in a few months could be because of the hype. In such cases, look at the company’s business and its growth. Does the company have anything exciting for future earnings that could encourage you to pay a hefty price? See if the revenue and earnings growth is steady or if there is a sudden jump. Then, see if this surge is sustainable in the long term.
Let’s use the above pointers to analyze two growth stocks. That way, you can determine if it is the growth stock you can buy whenever possible.
Constellation Software vs. Shopify
Constellation Software (TSX:CSU) is in a long-term growth trend. It is gradually increasing its company size by acquiring niche software companies that offer mission-critical software and enjoy steady cash flow. It uses this cash flow to buy more such companies. Constellation maintains secrecy around which company it is buying to avoid attracting competitors’ attention and opening a bidding war. A bidding war will inflate the asking price and make the acquisition less desirable.
Growing through acquisitions has helped it diversify into over 100 verticals and several geographies. This diversification reduces industry-specific risk and keeps the revenue and cash flow charts growing double digits. Its diversified client base helps it offset weaknesses in some verticals with strengths in others.
Now, let’s look at Shopify (TSX:SHOP). Shopify’s stock surged 200% in 19 months after the March 2020 pandemic dip. A 200% growth over 19 months is normal for the e-commerce stock. It achieved similar growth before (February 2019 to February 2020). But what came as a warning was the reason for the uptick during the pandemic. That growth was cyclical, as it brought 10 years of revenue growth in two years.
While Shopify is a good long-term investment, it is prone to such bubbles, as it only caters to one vertical: retail. Moreover, the software is not sticky and is prone to economic situations. The company has not yet generated sustained profits, but that is the nature of e-commerce, which is revenue-based. While Shopify is a good growth stock, it is highly volatile.
How to make money from Shopify
The right way to make money from Shopify is to buy the dip and not the seasonal high. The stock has surged 75% since November, riding the Santa Claus rally. It is currently trading at its seasonal high. I expect a correction in February or March. If the economy falls into a recession, as economists predict, Shopify stock could see a 30-40% dip. Hence, with volatile stocks like Shopify, you have to tread with caution.
A growth stock to buy whenever you can
But not all growth stocks are like Shopify. Constellation’s diversified portfolio of mission-critical software companies makes it resilient to economic downturns and enhances its upside in a growing economy. The stock has lower volatility than the market, making it a buy anytime at any price. It is in a long-term growth trend with sustainable and stable revenue growth and profit margins.
A $3,700 price might look expensive, but so did the $2,000 price in July 2022. In 16 months, the stock crossed the $3,000 mark (November 2023) and is now heading for the $4,000 mark in less than a year. The wait for a dip has already cost $1,700 in opportunity costs. Consider buying this stock whenever you can. Because this $3,700 could become $5,000 in the next two years.
Another resilient growth stock with low volatility you could buy whenever you can is Descartes Systems, which is trading above $121.
