2 Undervalued Canadian Growth Stocks to Buy Now

While these two growth stocks may not be near all-time highs, this could mean they have a lot more room to run.

Amy Legate-Wolfe

Amy became interested in investing in 2018 after having her first daughter. After receiving a masters degree in journalism from Western University, she became frustrated that the finance industry remained a confusing place for Canadians like her: new parents, millennials, and other young people who needed to understand their finances. Now, Amy focuses on tech companies and renewable energy for growth opportunities, coupling that with long-term investing strategies and equities. She also provides investors with a daily newsletter, Canada Stock Digest, for daily market updates. Before joining Motley Fool Canada, she wrote for major news organizations including HuffPost, CTVNews.ca, and CBC. When she’s not researching investing strategies, Amy’s time is pretty much monopolized by her two wild daughters, but in what little spare time she has she loves to do yoga, go on walks with her dog, and travel with her husband. Follow Amy on LinkedIn and Canada Stock Digest. Favorite Investment Quote: “October: This is one of the particularly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” – Mark Twain

Published October 17, 2024 1:30 pm EDT

Growth stocks can sometimes be overlooked, especially when they face market volatility or industry-wide challenges. However, two TSX-listed stocks, goeasy(TSX:GSY) and OpenText (TSX:OTEX), appear to be prime examples of undervalued gems – ones that could offer substantial growth potential in the near future. Both growth stocks have faced their fair share of challenges recently. But strong fundamentals, solid dividend histories, and promising outlooks make them attractive investment options today.

dividends can compound over time — Source: Getty Images

Goeasy

Goeasy, a financial services provider known for its consumer lending and leasing services, has shown remarkable growth over the past few years. Despite broader market turbulence, the growth stock has posted solid earnings in its most recent quarter, recently with a year-over-year revenue increase of 15.4%. Its operating margins remain strong at over 43%, and its return on equity stands at an impressive 25.3%. These numbers highlight goeasy’s resilience and profitability, even in challenging environments.

Although goeasy has seen significant gains over the past year of 64%, it still trades at a relatively low valuation. The stock’s forward price/earnings (P/E) ratio sits at just 9.3, suggesting there’s plenty of room for growth. For a growth stock with a history of solid earnings and a growing revenue base, goeasy’s current valuation seems like a bargain. Plus, the company’s management effectiveness indicates that it’s efficiently using its capital to generate profits.

OpenText

OpenText stock is a global leader in enterprise information management software, helping businesses manage and secure their data. The growth stock’s most recent quarterly earnings report, however, showed a revenue decline of 8.6% year-over-year. This may have contributed to its underperformance compared to broader tech stocks. Despite this, the company’s profit margin of over 8% and strong cash flow of $967 million show that OpenText remains financially sound.

OpenText currently trades at a forward P/E ratio of 9.5, which suggests that it is deeply undervalued compared to its historical trading range and its peers in the tech sector. With a price-to-book ratio of just 2.2 and a consistent dividend yield of around 3%, the growth stock offers both value and income potential. Investors looking for exposure to tech without the high valuations of other stocks may find OpenText to be a compelling option.

Today’s value

Both goeasy and OpenText offer attractive dividends, which is a rare perk for growth stocks. Goeasy’s forward annual dividend yield stands at 2.5%, with a payout ratio of just 27.7%, therefore leaving plenty of room for future increases. OpenText, on the other hand, has a forward annual dividend yield of 3.1% and a five-year average yield of 2.2%. Thus, these stocks offer a steady income stream for investors who like to blend growth with dividend income. These dividends are supported by strong cash flows, which are essential for maintaining payouts even in more challenging times.

The future looks bright for both companies, as goeasy continues to expand its customer base and grow its loan portfolio. Meanwhile, OpenText remains well-positioned to capitalize on the increasing demand for data management solutions. Analysts expect goeasy’s earnings to continue climbing. Supported by its low default rates and growing market share in the alternative lending space. OpenText, despite its recent revenue decline, is positioned to benefit from long-term trends in digital transformation, making its current dip an opportunity rather than a red flag.

Bottom line

While both companies have faced their challenges, including OpenText’s recent revenue dip and goeasy’s exposure to consumer credit risk, these issues are manageable. In goeasy’s case, its loan default rates remain low, and its strong cash position allows it to weather economic downturns. OpenText’s revenue decline is a short-term setback, and with the company’s strong fundamentals and consistent performance over time, this may be a temporary blip in an otherwise solid growth trajectory.

Altogether, goeasy and OpenText offer a compelling mix of growth potential, value, and income, making them attractive stocks for investors seeking undervalued opportunities. The growth stocks offer solid financials, reliable dividends, and promising outlooks, suggesting that both growth stocks are positioned for long-term success.