Amid the digitization of business processes and increased usage of AI (artificial intelligence), the demand for software products and solutions is rising, thus increasing the stock prices of IT (information and technology) stocks. The Nasdaq Composite Index (weighed heavily by IT companies) is up around 31% for the last 12 months. Meanwhile, given the favourable environment, I expect the upward momentum to continue.
Against this backdrop, you can buy the following three top Canadian IT stocks to reap superior returns.
WELL Health Technologies
After delivering impressive returns of 78.2% last year, WELL Health Technologies (TSX:WELL) has continued its uptrend this year, increasing its stock price by 5.8%. Despite the surge in its stock price, the company’s valuation looks reasonable, with WELL stock trading at an NTM (next 12 months) price-to-earnings multiple of 24.8.
Moreover, the company’s addressable market is expanding amid the digitization of clinical procedures, the growing adoption of virtual services, and the increasing usage of software products and services in the healthcare sector. Further, the company is developing innovative products to aid healthcare professionals in delivering positive patient outcomes. The digital healthcare company is also expanding its footprint inorganically through strategic acquisitions and has a solid acquisition pipeline with 17 signed LOIs and definitive agreements.
Besides, WELL Health is working on spinning out its SaaS (software as a service) healthcare technology company, WELLSTAR Technologies, which supports 37,000 healthcare professionals. With the spinoff, investors will get a prime opportunity to invest in a pure-play digital healthcare company. Considering all these factors, I expect WELL Health to deliver superior returns over the next three years.
Constellation Software
Second on my list would be Constellation Software (TSX:CSU), which acquires, manages, and builds software businesses. The company continues to reinvest its cash flows in developing and acquiring mission-critical software solutions, thus driving its financials and stock price. In the first three quarters of this fiscal year, the software firm has grown its top line by 21% boosted by organic growth and acquisitions over the last four quarters. Meanwhile, its EPS (earnings per share) has increased by 5% to US$21.04. Supported by these solid financials, CSU’s stock price has risen 21.1% in the last 12 months, outperforming the broader equity markets.
Further, CSU generated US$1.5 billion of cash from its operations, thus raising its cash to US$2.1 billion at the end of the third quarter. So, the company is well-positioned to continue with its strategic acquisitions, thus boosting its financials. Constellation also pays a quarterly dividend of $1.00/share, translating into a forward yield of 0.13%. Given its diversified customer base and healthy growth prospects, I believe CSU would be an excellent buy now.
Kinaxis
Another IT stock I am bullish on is Kinaxis (TSX:KXS), which offers supply chain management solutions. The company has delivered more than 20% returns in the last 12 months amid solid financials and healthy growth prospects. In the recently reported third-quarter earnings, its topline grew by 12% amid solid performance from its SaaS, professional services, and maintenance and support segments.
Driven by the topline growth and improving operating margins, its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) grew by 32%, while its adjusted EBITDA margin improved from 21% to 25%. It also generated $30 million of cash flows from its operating activities compared to cash utilization of $1.5 million in the previous year’s quarter.
Its growing annual recurring revenue, higher customer retention rate, new customer acquisition, and continued strategic acquisitions should support its future growth. Considering its healthy growth prospects and improving profitability, I believe Kinaxis would be a worthy buy right now.
