In a bullish market, stock prices are rising, creating exciting opportunities for investors. Over the last 12 months, the Canadian stock market has surged approximately 25%, yielding total returns close to 29%. This performance outshines the 10-year annualized returns of roughly 9%, illustrating the current momentum.
While bullish trends can be enticing, it’s crucial for investors to tread cautiously to avoid overpaying for stocks. The market is influenced by a complex mix of factors, including business growth prospects, historical performance, dividend yields, and overall market sentiment.
Having a long-term investment perspective
Investing in a bullish market requires careful consideration of your financial situation. You should only allocate funds you won’t need for at least three to five years. This approach not only provides time for volatility to settle but also allows for meaningful growth in the businesses behind your investments. A longer investment horizon means you can ride out any potential downturns, maximizing your chances for wealth creation.
The key to success lies in identifying companies with solid fundamentals and promising growth prospects. Instead of chasing hot stocks, focus on those that can deliver sustainable returns over time. Remember, investing is not a sprint but a marathon. Patience can often lead to substantial rewards, especially when you strategically select stocks that align with your investment goals.
Open Text: A value stock with promise
One value stock idea is Open Text (TSX:OTEX), a global leader in information management software and services. The company offers a wide range of solutions around information management, involving cloud services, artificial intelligence (AI), analytics, cybersecurity, and application automation. These services cater to diverse industries such as healthcare, finance, and automotive, positioning Open Text as a versatile player in the tech landscape.
Open Text’s strategy is characterized by aggressive growth through acquisitions, with 42 acquisitions under its belt according to Tracxn. Over the last decade, the company has demonstrated impressive growth metrics on a per-share basis: a compound annual growth rate (CAGR) of 12.1% in sales, 10.4% in operating income, 12% in EBITDA, and 12.3% in dividends. While increasing its long-term debt at a CAGR of 16.6%, Open Text has also successfully grown its assets at a 12.4% CAGR, demonstrating robust financial management.
In 2023, the company made headlines with its largest acquisition, Micro Focus, valued at approximately US$6 billion. This strategic move intends to enhance Open Text’s capabilities in cyber resilience and information governance and add capabilities in application development and modernization, advanced analytics, and IT operations.
Recently, Open Text sold its AMC/Mainframe business for nearly US$2.3 billion, using the proceeds to reduce debt by around US$2 billion. This financial maneuver has improved its net leverage ratio to the top end of its target at 2.9 times, indicating a healthier balance sheet.
Future growth potential
Over the next three years, Open Text anticipates a higher demand for its cloud, security, and AI services, coupled with margin expansion. Currently, shares trade at an attractive price-to-earnings ratio of about 8.4, suggesting they may be undervalued. The management’s commitment to repurchasing shares – targeting $300 million this fiscal year, double last year’s amount – reinforces the belief that the stock offers great value and strong upside potential.
At a recent price of $46.56 per share, Open Text offers a dividend yield of roughly 3.1%, providing a solid base for returns. While investors may need a long-term investment horizon for meaningful price appreciation, the company’s growth strategy and solid fundamentals make it a good candidate for those looking to invest in a bullish market.
