People who like to invest for the long term don’t always want to own the fastest-growing TSX stocks. Rather, patient investors are wiser to look for businesses that can steadily and consistently create value over long periods of time.
Image source: Getty Images
Slow and steady growth is better than all-or-nothing growth
Any business manager can sacrifice their balance sheet or customer relationships to temporarily juice revenue and earnings growth. Yet, those actions could potentially hamper the future existence of the business in its entirety.
It is much better to find stocks in companies that thoughtfully invest and grow. The mindset should be to lengthen the longevity and quality of their business.
A business should not grow for the sake of growth. Rather, it should grow with the mindset to improve the quality and durability of its cash flows and earnings per share.
Just like the tortoise and the hare, slow and steady/thoughtful and wise tend to win the reward. If you are looking for these types of stocks, here is one to consider for the next 10 years today.
DSG: A top TSX tech stock with a steady trajectory
Descartes Systems (TSX: DSG) is not the flashiest technology stock in Canada. It aims to grow annually by around 10-15% a year.
Descartes has exceeded that plan over its history. It has grown free cash flow per share by a 15% compounded annual growth rate (CAGR) and earnings per share by a 17% CAGR.
The company has demonstrated a consistent ability to grow. Its transportation network has become essential to transport, shipping, and logistics providers globally. In fact, its logistics network services nearly 60% of the entire global transport industry.
Once it signs a new customer, they are very likely to stay connected to its essential services. Descartes’s chief executive officer has iterated a motto of “Making customers for life” many times over the years. Once a customer adopts one of Descartes’s services, they are very likely to utilize more of its other software services.
These services help customers save time, resources, and money. Consequently, Descartes experiences very low churn throughout the year. Customers don’t just want its services; they need them to grow/maintain their businesses.
That is why this company tends to trade at a steep valuation. It has a strong moat, and great flywheel and network effects. The company is extremely profitable, and it generates a lot of excess cash every quarter.
Traditionally, it has taken its cash and invested it into acquisitions that strengthen its product/services portfolio. Its acquisition cadence has recently slowed. However, management believes it will see good opportunities in 2024 and beyond.
Descartes is the ideal stock to hold for a decade ahead
Right now, Descartes is sitting with $320 million of net cash. It has the firepower to go out and be aggressive with acquisitions. Even though this business is quite pricey at 35 times free cash flow, it is only trading slightly above its five-year average.
Descartes stock may not be a bargain today. However, as per many other great quality businesses, it almost never trades at a discount (think Visa, Costco, and Microsoft). If it can continue its strong, steady trajectory, it may be worth buying and holding for the decade ahead.
