CLS Is Great: Here’s Why You Shouldn’t Buy it

While seemingly unstoppable, Celestia stock might not make the best holding to add to your self-directed portfolio right now.

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After a tough year full of volatility, for the most part, the primary Canadian benchmark index saw an uptick in the last quarter of 2023. The stock market rally in the last quarter started primarily due to the investors’ hope that central banks in the U.S. and Canada will slash key interest rates. However, the consumer inflation data in the U.S. turned out to be much hotter than anticipated.

Due to the possibility of higher inflation persisting, it reinforced the chances of the Federal Reserve maintaining higher interest rates for longer than anticipated. With the Canadian economy being closely tied to the neighbouring country south of the border, the S&P/TSX Composite Index is volatile in the first few weeks of trading in 2024.

Despite many massive ups and downs, several fundamentally strong Canadian stocks continue to outperform the TSX Index by a significant margin. Today, I will highlight one such seemingly unstoppable TSX growth stock to watch closely.

Celestia

Celestia (TSX:CLS) is a relatively unknown but top-performing stock on the TSX in recent years. Over the last three years, CLS stock delivered 278% positive returns to its investors. The $5.95 billion market capitalization Toronto-headquartered firm operates in the Canadian tech sector.

Its primary role is providing supply chain solutions across two business segments: Advanced Technology Solutions (ATS) and Connectivity & Cloud Solutions (CCS).

Its ATS segment comprises the ATS end market, which works with several sectors of the economy. Its CCS segment derives the majority of the company’s revenue from communications and enterprise end markets.

The continued strength in the demand for its services for markets worldwide drove its revenue up by 11.8% year over year in the first three quarters of fiscal 2023, hitting the US$8.5 billion mark.

To make things even better, the company’s adjusted earnings in those three quarters rose at an even faster rate of 23.7% year over year. These factors have proven that the company has a strong ability to maintain solid profitability, despite macroeconomic jitters.

Considering the positive revenue growth for the business in both segments in 2024, it might not be surprising to see the stock continue outperforming the broader market. However, all of this positive momentum might be why I suggest considering the contrarian route and waiting on the sidelines.

Foolish takeaway

Based on everything that I have talked about so far, nothing seems to indicate that there are reasons to avoid adding the stock to your holdings.

Celestia stock’s last reported balance sheet showed that it has liabilities of US$3.10 billion due within 12 months and US$912.4 million in liabilities due after a year. The balance sheet also showed that it has US$353.1 million in cash and US$1.65 billion worth of receivables due within a year.

The debt and earnings situation with the stock might be a crucial factor to consider in the coming months. Depending on how the key interest rate situation changes, the company’s financing costs might have a significant positive or negative impact on its performance on the stock market.

For those interested in investing in the seemingly unstoppable growth stock, waiting for a pullback in its share prices might be better before adding it to their holdings.

As of this writing, CLS stock trades for $50 per share, up by 249.65% from its 52-week low.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Adam Othman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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