Canadian stocks are rising despite the higher tariffs from the United States. Driving the rally is the latest Bank of Canada interest rate cut. While some seasonal stocks started soaring, some plunged. Among those that fell are some obvious stocks. Shopify has begun its seasonal jump, but Descartes Systems (TSX: DSG) stock stays grounded near its 52-week low. Meanwhile, Topicus.com (TSXV: TOI) stock fell 15% in September, and a further dip is likely.
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Why are these Canadian stocks falling in a bull market?
Descartes stock
Descartes stock has been hovering near its low as the company’s management warned about the slowing trade volumes. Despite this, the company reported a 10% year-over-year growth in revenue and net profit in the second quarter, the first full quarter of tariff impact.
The company earns more than 65% of its revenue from the United States and around 24% from Europe, the Middle East, and Africa. As the United States is at the centre of the tariff war and is restricting trade, Descartes is feeling the impact. Hence, the stock did not rise along with Canadian stocks. Moreover, the high valuation of the stock, 12.4 times price-to-sales ratio, and a 44.6 times its forward price-to-earnings ratio, might keep the stock in the $130-$150 range until tariff uncertainty persists.
Although the short term is uncertain for Descartes, it is well-positioned to capitalize on changes in the supply chain with its Global Logistics Network (GLN). Any easing in the tariff war or Descartes’s expansion into new markets could revive growth and send the stock up by double digits.
Until then, it is a no-brainer stock to keep accumulating in the dip. Why so?
Descartes has zero debt and $240.6 million in cash. It continues to generate cash from domestic trade volumes and global trade intelligence. This will keep it resilient in the current crisis.
Topicus.com
The stock of Topicus.com has been on a free fall since the founder of its parent company, Constellation Software, resigned abruptly for health reasons. The stock market is reacting to this shock.
Then there have been concerns that artificial intelligence (AI) could disrupt the software business. If AI starts generating positive free cash flow, maybe Topicus.com might have to rethink its strategy.
Topicus.com operates as a private equity firm for software companies. A private equity business adapts to changing trends, seeking opportunities to generate return on investment (ROI). Topicus.com will continue to buy vertical-specific software companies in mission-critical applications.
The beauty of mission-critical is that they are sticky and take a while to adopt new technologies. Many licensing software solutions have shifted to the cloud. However, that did not disrupt Constellation’s model.
Until the AI proves it is secure, the software will continue to work. Software companies and Topicus.com are also watching the AI trend and how it is shaping the industry. They will adapt to the changing environment to avoid becoming obsolete. Until then, the compounding model will grow revenue and free cash flow.
Investor takeaway
A patient investor buys the dip of a fundamentally strong company, which time and again rebounds on the back of its strong business model. They don’t react to the noise but trust the process and read the figures. If the company’s management is not aligned with market reality and refuses to accept the problem at hand, that is a stock to walk away from despite strong fundamentals.
The management of Descartes and Topicus.com is aware of the market situation and is conservative in its approach. This shows that the companies are well-placed to address the issues before they snowball into something out of their control. Once they address the issue and the economy revives, they have a good chance of a stronger recovery. Such stocks are no-brainers where investors can buy the dip to take advantage of a recovery rally.
