The TSX Index of stocks is often typified for its heavy weighting to mature banking, financial, energy, and real estate stocks. The Index is particularly known for its plethora of dividend paying stocks.
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Best to pick individual stocks over the TSX Index
Unfortunately, if you want to compound your capital at high rates of returns for years ahead, it is not the greatest index to hold (unless you want exposure to those specific areas). The TSX has delivered an approximately 8% average total return over the past decade. While this is not bad, an investor has earned those returns on a relatively concentrated basis to the above sectors.
Yet, under the obvious surface, Canada has a sprinkling of high-quality, compounding stocks. These stocks have beaten the TSX Index, and they are likely to continue to do so.
Many of these stocks have used a serial acquisition model to grow and scale globally. If you are looking for TSX stocks that could beat the market for a decade or more, here are three I’d look at buying today.
A software tech stock
VitalHub (TSX:VHI) is a top pick if you want to hold a TSX small-cap stock with significant growth potential. It has a market cap of $613 million today.
VitalHub provides specialized software for niche areas of the healthcare industry. It operates in Canada, the U.K., the Middle East, and Australia. Its focus on niche segments allows it to avoid competition from larger players and still earn attractive returns on capital.
VitalHub has been very acquisitive. It has made over 20 acquisitions since it became a public company. Revenues have risen by a 37% compounded annual growth rate (CAGR) in the past three years. Earnings per share have risen by an 82% CAGR.
The company still has a large acquisition pipeline. Demand for services that make healthcare more efficient and effective should only rise in the years ahead. It is an attractive stock if you want a multi-bagger return ahead.
A TSX real estate stock that is so much more
If you want a larger serial acquirer, you should look at Colliers International Group (TSX:CIGI). This TSX stock has a market cap of $8.75 billion.
While its stock is down 10% this year, it has been making substantial progress to grow its business. This year, it has made large acquisitions in all its core segments: real estate services, engineering, and asset management.
Each of these core segments could now be a substantial standalone entity. At some point, spinning them off could make sense. The market doesn’t fully recognize the value of these entities inside of Colliers.
Colliers has much to like for a long-term stock: a founder-led management team, a long-term track record of mid-teens returns, avenues for long-term growth, and a solid balance sheet. It trades at an attractive value today.
A top tech stock that has temporarily sold down
Descartes Systems (TSX:DSG) is another slightly beaten-down TSX compounding stock. After a 17% decline this year, it has a market cap of $11.6 billion.
Descartes provides quintessential software to the transport and logistics industry. The global trade war has created uncertainty for shippers, and Descartes stock has pulled back. Yet, there are reasons to still like the stock.
The company has $176 million of cash on the balance sheet. It can be opportunistic to deploy that into acquisitions. The depressed market could bring acquisition valuations to attractive levels. The company generates high recurring revenues, elevated profit margins, and ample cash flow every quarter.
While it trades at an elevated valuation multiple, the pullback does make its stock more attractive. It could be a great time to buy this TSX stock for a decade hold ahead.
