Sometimes the world feels a little crazy, and so does the Canadian stock market. Trading and speculating have become the norm, and they certainly elevate volatility. Fortunately, history has proven that a counter approach of patient, long-term investing can outperform. Stock performance does eventually align with business and financial performance.
Savvy long-term investors can use rapid stock fluctuations to add to great businesses when their stock underperforms. When the recovery hits, you can see your portfolio value rapidly increase to the upside.
If I were looking for undervalued Canadian stocks to buy now for future upside, here are two I would add right now.
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Constellation Software: A cheap Canadian growth stock
With a market cap of $56 billion, Constellation Software (TSX: CSU) is one of Canada’s largest tech companies. However, its market value has been nearly cut in half over the past year.
The market has taken a shoot first, ask questions later approach to software stocks. Artificial intelligence (AI) has created a perceived threat against software business models. It doesn’t help that Constellation’s long-standing CEO suddenly retired due to health reasons last year. It created a sentiment storm that rapidly pulled the stock down.
Yet, Constellation is not just a typical horizontal software company. It is a mix of over 1,000 niche vertical-market software businesses. Constellation is highly decentralized, so it empowers its managers to make operating decisions close to the customer.
While Constellation sees AI as a concern, it is also an opportunity. It can fix glitches and issues significantly faster. Likewise, it can use AI to create new solutions that it can sell. Likewise, it can use the valuation pullback to acquire more software businesses.
So far, results have been excellent despite the fears. Last quarter, revenue rose 20%, and free cash flow increased 44%! Organic growth remained strong at 6%.
Today, Constellation stock trades for close to its lowest valuation in 10 years. You can pick this high-quality Canadian growth stock up today for an 8% free cash flow yield. If you don’t mind being a contrarian, this is a great purchase right now.
Colliers: A top stock for contrarians
Colliers International Group (TSX: CIGI) is another Canadian stock that is beaten down. However, it won’t be down forever. This $6.7 billion company operates one of the largest commercial real estate brokerages in the world. It also has growing businesses in asset management, engineering/advisory, and property management/real estate services.
Colliers is down 35% year to date. Like software companies, professional services stocks have also been pulled down on fears about AI.
Colliers operates a globally diversified business. It requires professionals who are highly in tune with their specific markets. If anything, AI will make it easier for these professionals to do their jobs and expand their services. Their experience, client rapport, network, licensing, and accreditation are not something AI can just replicate.
That’s not to say Colliers doesn’t have some near-term headwinds. A recent spike in interest rates may be keeping a cap on real estate transaction activity. The good news is that more than 70% of its income is now derived from recurring contracts or business.
You can buy Colliers stock for only 12 times earnings and with an 8% free cash flow yield. Colliers has high insider ownership, so you get to own alongside managers who have aligned incentives. You may need to be patient, but you get to pick up this Canadian stock at a bargain price today.
