2024 has been a good year for Canadian stocks. The TSX Index has risen by almost 20%. For an Index that averages around 7% annually, that is certainly a solid year in the books.
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Markets are pricey, but invest in quality stocks with a long-term horizon
Undoubtably, markets have become a little overheated, and stocks are not cheap today. There are likely to be some corrections in the new year. That will create some opportunities for investors with cash looking to build out their portfolios.
If you are investing for the long term, look for stocks in solid, high-quality businesses. Look for companies that have great products/services, reputable brands, strong balance sheets, and smart, incentivized management teams.
You might not always get the valuation correct with these stocks. However, if you hold for the long term, these businesses can justify even slightly overpaying.
If you have $5,000 to invest in the new year, here are two Canadian stocks to add on any market dips or pullbacks.
Constellation Software: A top Canadian stock for long-term compounding
With a price of +$4,600, Constellation Software (TSX:CSU) is a $97 billion company today. After a 40% run-up in 2024, this Canadian stock is not cheap. It trades at about 30 times free cash flow right now.
However, Constellation is a premier Canadian company that most people have never heard of. That is because it operates through hundreds of small, niche software subsidiaries around the world. Its offerings might be bowling alley management software, medical practice solutions, or specialized legal software for a specific jurisdiction.
These tend to be essential programs for its customers. The great thing is that Constellation can acquire these businesses at low valuations and earn attractive returns on the capital it deploys.
It uses management best practices to maximize cash flows from the businesses. It then takes the cash and buys more. With over 50,000 vertical market software businesses globally, there is still a large market for Constellation to consolidate.
Constellation operates with a true compounding formula. Its management has proven to be thoughtful and aligned with shareholders.
Shareholders also now have the option of owning Constellation’s spin-offs: Topicus.com or Lumine Group. These stocks provide access to specific geographic or industry exposure. Their price tag (but not necessarily their valuation) is a little bit lower than the mother ship.
Fortunately, with most brokerages offering fractional share purchases, buying a stake in Constellation is more attainable than ever. You just want to be cautious about valuation today. However, if you look at Constellation’s stock chart, there has never been a bad time to add this Canadian stock to your portfolio.
TerraVest: An up-and-coming Canadian stock with a strong return record
Another Canadian stock to consider adding on a dip is TerraVest Industries (TSX:TVK). It has a business model similar to that of Constellation. However, it has a focus on businesses in the industrial sector.
It owns tank and trailer manufacturers, boiler and HVAC companies, and energy service businesses. These are hardly exciting companies.
However, what is exciting is how TerraVest can acquire these types of businesses at very low valuations. It uses operating expertise to increase margins and grow sales. The company has an excellent track record of capital allocation.
That is reflected in an 850% return in the past five years and a 2,441% return in the past 10 years. Today, at 22 times free cash flow, TerraVest is not the cheapest stock.
However, if you can pick this Canadian stock up on any dip or near-term market worry, it could be a great addition to a compounding portfolio.
