In the short term, investing in stocks is unpredictable. Stocks can fluctuate for a variety of reasons that are out of an investor’s control.
Stocks can trade up and down based on factors like politics, geopolitics, local or international economics, industry/business-specific reasons, or even institutional movements in money (to name just a few).
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Near-term stocks are volatile, but you can make an educated bet for the long term
The point is, in the short term a stock’s movement is anyone’s guess. It is unpredictable. Trading in and out based on near-term fluctuations is just as profitable as going to the casino.
However, if you take a long-term approach, stocks become much more predictable. Certainly, no investment is ever certain. However, taking a long-term approach can help improve your results.
See, over long periods (like 5 and 10 years), stocks follow their business results. A stock that grows earnings and cash flow per share by a mid-teens rate is very likely to average a mid-teens annual return.
Maximize returns by earnings and valuation growth
Fortunately, investors can sometimes do even better than the business return if they purchase the stock when it is undervalued, misunderstood, or mispriced.
Often as businesses prove their ability to generate reliable revenue, earnings, and cash flow growth, they get a nice upward valuation re-rating. A stock can really start to soar when both these dynamics are in play. If you are looking for stocks that could enjoy a double play, here are two to consider today.
An up-and-coming fintech stock
Propel Holdings (TSX: PRL) is benefitting from a double-play scenario. While this stock has a market cap of $800 million, it only had a market cap of $250 million a year ago. This demonstrates how quickly a smaller-cap stock can deliver for shareholders.
Propel provides small, specialized loans to the non-prime consumer market in the U.S. and Canada. It utilizes a proprietary artificial intelligent underwriting program to evaluate thousands of factors when a person applies for a loan. As a result, it can quickly and effectively underwrite and approve/refuse loans.
Over the past five years, it has grown earnings per share by 850% (or a 75% compounded annual growth rate (CAGR)). Last year, it traded with a price-to-earnings ratio of 9.5 times.
As it has proven out its business model and delivered strong earnings growth, it has re-rated to 14.5 times today. Even without a re-rating, this stock is expected to grow by 50%-plus in 2024.
A growing health tech company
Another small-cap stock that could continue to provide strong returns is VitalHub (TSX: VHI). Like Propel, it has delivered strong returns in the past few years. In one year, its stock is up 176%!
VitalHub provides software to the healthcare industry. It helps health providers save time and money, and improve patient outcomes. Once adopted, this software becomes essential in managing various aspects of healthcare.
Over the past three years, it has grown revenues by a 43% CAGR. Earnings before interest, tax, depreciation, and amortization (EBITDA) has risen by an outstanding 113% CAGR. The company is now generating an attractive stream of free cash flow that it has been using to invest in acquisitions.
It still remains early days for this Canadian tech stock. Paying 14 times free cash flow and 9 times EBITDA is not an unreasonable price for a stock growing so quickly.
