The optimum use of a Tax-Free Savings Account (TFSA) happens when you invest in growth stocks for the long term. Capital gains taxes reduce the investment income from the sale of stocks. However, investing through the TFSA can help you avoid capital gain tax, with its special tax treatment. Hence, this account needs growth stocks you can buy and hold for life to maximize your capital gains.
Two Canadian stocks to buy and hold in TFSA
TFSA contribution is limited for each individual. Don’t let this tax benefit go to waste on speculative stocks that have a high risk of downside. Instead, consider investing in stocks you know will give you handsome returns in the long term.
Descartes Systems stock
Descartes Systems (TSX:DSG) stock fell to its 52-week low due to the impact of tariffs on trade volume. The stock was overvalued at the start of the year, but the dip has corrected its valuation from a forward price-to-earnings ratio of 51 in January 2025 to 27 now.
This is an opportunity to buy this fundamentally strong stock and hold it for life. Consider this the bottom of the tariff downturn. The market has absorbed the uncertainty that came with trade negotiations. Countries are now looking for alternatives with new government policies worldwide, shifting to a new global supply chain.
The shift in supply chain will open up new opportunities for Descartes for transport management, routing, customs, and regulatory compliance. The company has recovered from the 2016 oil crisis, the 2018 U.S.-China trade war, and the 2020 pandemic. With each crisis, the company has rebounded with stronger revenue growth and a higher adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin.
It is because trade became complex, and Descartes introduced new solutions to tackle these complexities. This time, the company has cut costs to preserve its EBITDA amidst low trade volumes. In the meantime, it has been acquiring companies for their technology and presence. As trade volume increases, Descartes could see an increase in demand, which will later reflect in the stock price.
Topicus.com
Topicus.com (TSXV:TOI) is another growth stock that dipped 17% in the last month, wiping out the seasonal rally of the second quarter. Behind the dip is the sudden stepping down of Mark Leonard, the founder of parent company Constellation Software. This management change is significant for a holding company like Topicus.com, as the compounding model it follows and implements efficiently is due to the management’s skill. Choosing the right company and the right valuation for acquisition and deriving value from them is a human skill.
However, the team that has been managing and running Topicus.com remains intact. So, you could see a revival of the company’s stock price in the medium term as investors absorb the management change at Constellation. All eyes will be on the next few quarterly earnings as investors gauge the impact of management changes on the profits.
The latest dip has significantly reduced the value of Topicus.com stock to a 35 times forward price-to-earnings ratio, its lowest in five quarters. Now is a good time to buy the stock as the accretive earnings per share of its acquired companies will boost its EPS and free cash flow and drive the stock to recovery.
Important note for TFSA holders
If you book profits from time to time and withdraw that amount from your TFSA, your TFSA contribution room will increase by that amount next year. So, if you withdrew $5,000 from a TFSA in 2024 for some reason, your 2025 contribution will grow by $5,000 in addition to the $7,000 limit added in 2025.
