Nothing against shares of e-commerce titan Shopify (TSX: SHOP), which has really risen up the market cap ranks of the TSX Index in recent years. While there are still tons of growth and AI-driven innovation to be had in the name, I’m just not so sure that investors will be as comfortable riding out the turbulent waves in the tech sector as fears of some sort of AI bubble begin to cause more investors to panic-sell.
Though panicking is never a good idea, especially for young growth investors who can handle the steep declines (buying more on weakness tends to be a great way to go), I do think that paying just a bit more attention to valuation could be a smart way to minimize damage if the stock market were to enter yet another tech-driven sell-off.
Of course, the tech scene has led the latest wave of selling, and while it seems like we could visit the depths of last month, there are names out there that I think have already been punished and might be overdue for a bit of a “free pass,” so to speak, should another tech dip be on the horizon to end off the year.
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No Santa rally for tech this year?
So much for a Santa Claus rally! Though there’s still time for markets to get more cheerful as we approach the year’s end, investors shouldn’t place bets with the expectation of such a short-term move.
At the end of the day, timing markets is not the best use of your efforts. Instead, investing for the next two, three, or even five years is a better way to go, as you look to enter oversold, undervalued names at times of pessimism, while trimming some of the overheated risk-on plays in the face of what could be another valuation reset of sorts in the market’s top growers.
While I’m still a huge bull on Shopify as it embraces AI (I still think AI and e-commerce are a wonderful match), I do think that the stock could be in for rougher sledding this holiday season, as investors turn against tech and look for ways to punish companies, rather than seeking reasons to keep buying. Also, 120.6 times trailing price-to-earnings (P/E) seems too rich for an environment like this, where hyper-growth sensations might be at risk of a multiple reset of sorts.
Constellation Software stock looks cheaper for the new year
Constellation Software (TSX: CSU) stands out as a better bargain bet, at least in my view, now that shares are showing signs of slowed negative momentum. Though it’s too soon to tell if CSU shares are bottoming out after tanking more than 35%, I do think the 20.9 times forward price-to-earnings (P/E) is a very reasonable price to pay for one of the most enticing venture capital-esque software firms out there.
Undoubtedly, Constellation faces uncertainty after a key leader departed last year. That said, the winning formula is more about the team than an individual (Mark Leonard in the case of Constellation Software), at least in my view. As Constellation enters the new year, with a solid balance sheet and an improving pool of AI-enabled takeover targets in the Canadian software scene, I like the stock’s potential to bounce back after a rough year.
And while the 0.17% yield seems unremarkable, even negligible, I do think Constellation Software has an opportunity to grow its payout if it’s not going to make a big deal in the new year. If there are fewer acquisition opportunities, perhaps investors might have room for a bigger dividend. Either way, Constellation is a great value pick while it’s down.
