With the TSX Index trading just off all-time highs, many Canadian stocks (especially in the mining sector) are certainly highly valued right now. However, many stocks (especially in the software sector) have significantly pulled back in the past several months.
It presents opportunities for contrarian investors. This is not to say this is the bottom, but it might be time to start nibbling or building a position. If you don’t mind buying when everyone else is selling, these stocks could be just for you. Here are two undervalued Canadian stocks that could be worth buying right now.
This software stock is diving, but it looks attractive today
Topicus.com (TSXV:TOI) stock is down 49% in the past six months and 31% in the past year. Along with all other Canadian software stocks, it is getting sold off on concerns that artificial intelligence (AI) will significantly disrupt its business.
Certainly, some disruption is possible. However, Topicus is established in Europe with many niche software applications that are catered to very specific regions, industries, or sectors.
It has significant exposure to government, education, and banking institutions, which tend to be slower to respond to disruptive technologies. In fact, disruption is one of the last things Topicus’s customers want.
AI could in fact be a tailwind for Topicus. Topicus can both use AI to create and adapt software to new customers or applications. Likewise, AI can be implemented as tool for its customers to access and use wide swaths of data.
The point is that it is far too soon to assume that this business is dead. This is a business that is very likely to achieve over 20% growth in 2026. Keep in mind that this is very profitable growth with attractive margins and cash returns.
Right now, investors are only seeing the negatives effect of AI on software companies rather than the positives. As is often the case, the market shoots first and asks questions later.
Consequently, you can buy this Canadian stock with an 11% free cash flow yield and an enterprise value to earnings before interest, tax, depreciation, and amortization (EBITDA) ratio of only 11. From a growth to value basis, Topicus is starting to look like a very compelling buy.
A Canadian real estate services stock getting hit like its software
Colliers International Group (TSX:CIGI) has been getting drawn down like it is a software stock. It is down 15% in the past six months. Yesterday, it fell 6.3% in tandem with all the software stocks that were declining. Perhaps some passive market participants are getting Colliers’s ticker, CIGI, confused with the Canadian IT services company, CGI Inc?
Colliers is not an IT business. It operates a diverse real estate and infrastructure services business around the world. Contrary to the stock movement, I thought Colliers announced some positive news on Tuesday. It will be acquiring Spanish engineering firm, Ayesa Engineering for US$700 million.
The acquisition substantially broadens its engineering platform in Europe and the Middle East. It also completes a core piece in its rapidly growing engineering empire. This rising scale could make the engineering business a potential spin-out candidate in the future.
Right now, this company only trades with a price-to-earnings ratio of 17. It has a free cash flow yield of 6% today. For a company that grew year-to-date revenues by 19% and adjusted earnings per share by 22.5%, it seems like a reasonable bargain on a price-to-value basis.
