Growth stocks are some of the most loved — and hated — stocks out there. On the one hand, these are the stocks that tend to rise the most in bull markets. On the other hand, they’re usually among the biggest underperformers in bear markets. Basically, growth stocks exemplify the saying: “higher risk, higher expected return.” In this article, I explore the three Canadian growth stocks that could be among the next big winners.
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Shopify
Shopify (TSX:SHOP) is a Canadian e-commerce company that is already a big winner in Canada. The question is whether it can keep up the momentum and join the “Magnificent Seven.” As Canada’s largest tech company, Shopify seems to have what it takes to be a trillion-dollar giant: it has name recognition, it dominates its niche (high-end branded e-commerce), and it is involved in AI development. Shopify looks like the big U.S. tech giants in many ways. But the stock is still a ways away from a trillion-dollar market cap. If it can keep up the momentum, it could enrich investors in a big way.
Constellation Software
Constellation Software (TSX:CSU) is a Canadian tech company with a stellar long-term track record that has been taking a beating ever since its CEO stepped down last month.
Former CEO Mark Leonard is a legendary leader with a Warren Buffett-like reputation. Over the years, he has led Constellation through a huge growth spurt, one that has seen CSU’s stock price increase an impressive 21,000% in 19 years.
Mark Leonard had a great run. The question is whether the new CEO, Mark Miller, will be able to fill Leonard’s shoes when it comes to capital allocation. That remains to be seen. In the meantime, Constellation Software has a great collection of operating businesses that should keep providing returns for decades to come.
POET Technologies
POET Technologies (NASDAQ:POET) is a Canadian optics company that recently moved its listing to the United States. Do not be deceived by the NASDAQ listing: POET is a Canadian company through and through. Headquartered in Toronto, it was founded by an Indian-Canadian named Vivek Rajgarhia.
What does POET do exactly?
It’s a little hard to explain, but basically, it develops optical components that can be used in computer chips to increase data transmission speeds. Thanks to the rise of generative artificial intelligence (AI), computer chips are in high demand right now. Apps like ChatGPT take enormous amounts of computing power to run, and they run on chips that increasingly use POET’s components.
As a very small company, POET could increase in value dramatically in the best-case scenario. For this reason, the stock trades at optically high multiples: 1,244 times sales and 13.7 times book value! The stock is certainly not a bargain basement pick, but it’s both young and small. If you think of it as a public venture capital investment, you can envision scenarios in which POET works out.
Foolish takeaway
The bottom line on growth stocks is that you need to maintain your sanity while investing in them. It’s easy to get swept up in a high-growth story, and in your euphoria, forget to look at the sustainability of the growth. It happens to the best of us. I can’t tell you whether the three growth stocks mentioned above will perform well going forward. What I can tell you is that they are among the best in class when considered purely as businesses.
