When it comes to creating the perfect high-growth Canadian portfolio, investors may look to high-growth, short-term holds – meme stocks that will rise up fast, but fall just as quickly. That’s why today, we’re looking at some other options.
When investors want to build a high-growth TSX portfolio, beyond the growth rate, growth quality should be considered. Look beyond the revenue growth headlines to sources. Recurring revenue, customer retention, it all matters. Fast growth doesn’t last, so higher growth can create negative cash flow that makes these stocks riskier. So instead, let’s look at three Canadian growth stocks which offer that long-term quality over short-term quantity.
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SHOP
Shopify (TSX: SHOP) was once in the quantity category, yet in the last few years, a number of changes have turned it into a quality stock. During the second quarter, revenue rose by 31% year over year, with gross merchandise volume (GMV) rising globally. The free cash flow (FCF) margin hit 16%, marking eight consecutive quarters of double digit FCF growth.
What’s more, guidance is improving with third quarter growth expected to hit the mid-to-high 20s and the FCF margin to hit the mid-to-high teens. Now, it is a higher price in terms of multiples, and it’s sensitive to consumer spending and merchant acquisition and retention, as well as competition.
However, its position is enviable. Shopify stock is now a global powerhouse with durable top-line growth and strong FCF. And with recurring revenue on board, it’s a premier growth stock for long-term growth. Investors may consider a larger investment if conviction in sustained GMV lasts, though they may limit the size to control valuation risks.
CSU
Speaking of value, Constellation Software (TSX: CSU) is another growth powerhouse with recurring revenue and expansion through acquisitions making it a strong investment. The second quarter proved this as well, with revenue rising 15% year over year to $2.8 billion, driven mainly by acquisitions. It has historically strong cash generation, with a proven buy and hold merger and acquisition model.
This model has led it to develop a large and diversified collection of vertical software businesses offering recurring revenues. Now, growth is acquisition heavy so investors will want to watch purchase price discipline. However, CSU stock is well known for this, making the growth stock a top buy on a dip.
The other downside? Valuation can be high, with price to earnings elevated. Therefore investors will need to continue to monitor the growth stock. Meanwhile, it’s definitely a long-term hold rather than a buy for a quick buck.
GSY
Finally, we have goeasy (TSX: GSY), a non-prime lender with a diverse channel through branches, online, and point of sale. It holds a large addressable non-prime market in Canada that’s only expanding. This was seen during the second quarter, with record loan origination at $904 million, up 9% year over year. Its loan portfolio was up 23%, hitting $5.1 billion, while revenue rose 11%.
Net income also surged 32% year over year, with earnings per share (EPS) at $5.19. Free cash flow was positive and the efficiency ratio improved. It really was a quarter filled with solid growth across the board. That includes the dividend, which now pays $1.46 quarterly per share.
Now, its portfolio does focus on non-prime rates. A downturn could therefore spike charge offs and quickly compress EPS. That being said, it’s a solid growth and income name. The higher yield comes with higher cyclical and commercial risk. Therefore, make sure to size depending on your own risk tolerance.
Bottom line
When valuing growth stocks, don’t look to headlines. Quality is far better than quantity, especially when it comes to trying (and failing) to time the market. Instead, look to companies with recurring, stable revenue that have proven over the years that they know exactly what they’re doing.
