There are multiple strategies to invest in the stock market. For passive investors who do not have the time or expertise to identify individual stocks, passive investing is the right option. Here, investors can look to buy exchange-traded funds that provide diversification and lowers overall risk. While Warren Buffett is a fan of value investing another popular strategy is to hold growth stocks in your portfolio.
Growth stocks are companies that generally increase their top-line or profit margins at a faster rate compared to the overall market. Companies that are able to consistently outpace peers trade at a higher valuation allowing shareholders to derive market-beating returns.
Alternatively, investing in growth stocks carries significant risks in terms of volatility. In a bull market, these stocks will crush the broader market. But they will grossly underperform when markets turn bearish.
How to identify growth stocks?
One of the most important criteria while identifying growth stocks is to look at the market opportunity of a company. You need to look at companies that have the potential to disrupt the industry they are part of. We know how Amazon is now the undisputed leader in e-commerce and how Square has democratized payments processing for small and medium enterprises. Alphabet’s Google has changed the digital marketing landscape while Apple is the leading consumer technology company in the world.
All these companies have experienced strong revenue growth for multiple years which has allowed them to increase profit margins over time. The ultimate growth stock is a company that has rising revenue and profit margins as well as an optimistic earnings forecast, high returns on equity, and low debt levels.
While there are multiple growth stocks for the investor to buy and hold south of the border, Canada’s changing tech landscape has also created a massive opportunity where investors can now benefit from exponential gains in the long term.
Here, we look at 10 Canadian companies that are poised to beat the broader markets in 2021 and beyond.
The first stock on the list is Shopify which is now Canada’s largest company in terms of market cap. Shopify went public in 2015 and has since returned a staggering 4,740%. This means a $1,000 investment in Shopify stock soon after it went public would be worth close to $50,000 today.
Shopify is one the largest e-commerce companies in the world and has over a million sellers on its platform. It allows merchants to run their business across sales channels including web and mobile storefronts. The company also helps its merchant base to manage products and inventory, ship orders, and access financing.
The COVID-19 pandemic acted as a tailwind for Shopify and peers and accelerated the online shopping trend as people were forced to purchase online. In 2020, Shopify sales were up 86% year over year while its gross merchandise volume (GMV) soared by 96%.
Lightspeed POS is another growth stock on the TSX that you need to watch out for. This fintech company provides a cloud-based platform that helps small and medium enterprises to manage operations, improve customer engagement and accept payments among others. Lightspeed stock went public in March 2019 and has returned 371% in just over two years.
Lightspeed continues to grow its top-line growth via acquisitions. In the third quarter of fiscal 2021, Lightspeed increased sales by 79% year over year to US$57.6 million. Its gross transaction value surged by 48% to over US$9 billion and its payments revenue quadrupled compared to the prior-year period.
Analysts tracking the firm expect the company’s revenue to grow by 73.7% to US$210 million in fiscal 2021 and by 72% to US$361 million in fiscal 2022.
One of the top-performing stocks on the TSX ever since it went public, Constellation Software has proved it has a recession-proof business model. This stock went public back in 2006 and has since returned an astonishing 11,130%. Constellation Software aims to acquire profitable technology companies that provide mission-critical services to enterprises. These acquisitions are accretive and have allowed Constellation to expand its client base at a rapid rate across industries.
It primarily acquires, manages, and builds software businesses and has over 125,000 customers operating in more than 100 countries around the world. The company has a subscription-based business model allowing it to generate steady cash flows across business cycles.
Bay Street analysts expect CSU stock to increase sales by 17% year over year to $4.64 billion in 2021 and by 8.2% to $5.48 billion in 2022.
Dye & Durham
Valued at a market cap of less than $3 billion, Dye & Durham provides cloud-based software solutions to legal firms, financial service institutions as well as government organizations in Canada and Europe. Its cloud-based platform automates public record due diligence searches as well as other processes such as document preparation, lien registration, and real estate conveyancing.
In the December quarter, Dye & Durham generated sales of $33.7 million while adjusted EBITDA stood at a healthy $17.1 million. Both revenue and EBITDA rose by 96% year over year. In the year ending in June 2022, the company has forecast revenue of $340 million and adjusted EBITDA of $200 million, compared to revenue of just $65.5 million in fiscal 2020.
The company expects the integration of recent acquisitions to increase adjusted EBITDA by $30 million in the current fiscal year, indicating a year-over-year increase of 75%.
Score & Gaming
This sports media company offers a mobile sports app that delivers customizable news, scores, stats, and notifications for several gaming leagues in North America. The company also provides theScore Bet which is a mobile sports betting platform that delivers various pre-game and in-game markets and betting options as well as in-game data.
As several states in the U.S. are legalizing betting, Score & Gaming should experience a strong uptick in sales growth going forward. The company achieved a record gaming handle and another quarter of robust media revenue growth in the fiscal second quarter of 2021.
Company CEO, John Levy said, “Second quarter handle of $81.6 million on theScore Bet grew 491% year-over-year and 46% over the first quarter. We also recorded our highest-ever second quarter media revenue, with 17% year-over-year growth driven by our compelling content as well as our outstanding North American reach and audience engagement.”
Analysts expect the company to increase sales by 56.7% to $32.5 million in fiscal 2021 and by 100.5% to $65 million in 2022.
The first pot stock on the list is Aphria Inc. which will soon become the largest marijuana company in terms of sales after its acquisition with Tilray is closed. In the company’s recent quarter that ended in February, Aphria’s net revenue from cannabis sales fell 7.8% year over year due to pandemic-infused restrictions in Canada and Germany. However total sales were up 6.4% to $153.6 million.
Aphria generates revenue via distribution sales from its CC Pharma subsidiary in Germany as well as recreational and medical marijuana sales in Canada. The cannabis industry is still at a nascent stage and the prospect of federal legalization in the U.S. makes this an exciting space that’s all set to explode.
While most marijuana producers are currently unprofitable due to cost inefficiencies, the expanding market for cannabis will allow them to take advantage of economies of scale and improve the bottom line.
Analysts expect Aphria to grow sales by 15.3% to $626 million in fiscal 2021 and by 37.3% to $861 million in 2022.
Another fintech company that you need to watch out for is Nuvei Corp that provides payment technology solutions to merchants in North America, Europe, Latin America, and the Asia Pacific. It recently added payment solutions for 40 of the world’s leading cryptocurrencies including Bitcoin, Ethereum, Bitcoin Cash, and Ripple.
Nuvei generates revenue through fees for payment gateway services, as well as payment processing. Customers also pay the company for value-added services that includes monitoring and analytics.
In the fourth quarter of 2020, Nuvei’s payment volume rose by 53% year over year to US$13.9 billion. Comparatively, its revenue was up 46% at US$116 million and adjusted EBITDA soared by 61% to US$51.3 million.
In fiscal 2021, the company expects total volume between US$81 billion and US$87 billion. Revenue forecast for the current year is between $570 million and $600 million while adjusted EBITDA is estimated between US$252 billion and US$265 million.
Well Health Technologies
Another industry vertical that has been immune to COVID-19 is the health-tech space. Shares of Well Health Technologies have soared by 357% in the last year and are up 7,500% since its IPO in early 2016. The company aims to modernize and improve primary healthcare by leveraging digital technology and alleviate challenges faced by patients and healthcare workers.
The demand for digital healthcare solutions surged amid the pandemic which meant top-line growth for Well Health accelerated in 2020. It is an active acquirer of digital assets and primary healthcare services. The company claims its acquisitions are accretive digital assets and Well Health is now the single largest chain of primary healthcare clinics in British Columbia.
Analysts covering the stock expect it to increase sales by 319% to $210.4 million in 2021 and by 46% to $307 million in 2022.
The final tech stock on the list is Docebo which is a cloud-based enterprise-facing e-learning management system. It has customers in North America, Asia Pacific, and Europe. Docebo helps customers to centralize learning materials from peer enterprises and learners into a single learning management system to accelerate the learning process and increase productivity.
The pandemic also helped the company expedite a long-term trend towards the adoption of digital earning tools. In the December quarter, Docebo’s sales were up 53% year over year at US$18.8 million. Subscription sales rose by 49% to US$16.7 million accounting for 89% of total sales. This growth in revenue helped Docebo achieve a positive operating cash flow of US$7 million compared to the negative US$3.5 million figure in the prior-year period.
Brookfield Renewable Partners
The only growth stock on this list that also provides a tasty dividend to investors is Brookfield Renewable Partners. Since the start of this millennium, Brookfield Renewable Partners has generated annual returns of 18%, creating massive wealth for long-term investors. This stock has a forward yield of 2.82% which means a $5,000 investment in BEP will help you derive over $140 in annual dividend payments.
The ongoing shift towards clean energy solutions will be a key driver of revenue growth for Brookfield Renewables. It is already one of the largest renewable energy companies in the world and has a diversified base of cash-generating assets. It is part of a regulated industry that allows BEP to generate stable and predictable cash flows across economic cycles making the stock fairly recession-proof.
In 2020, Brookfield grew its funds from operations by 6% year over year and increased dividends by 5%. The company’s management expects to grow dividends between 5% and 9% while total shareholder returns are forecast between 12% and 15% in the near term.
The final takeaway
We can see that most companies in this list are part of large and growing addressable markets. These growth stocks will continue to benefit from secular tailwinds, network effects, and advantages of scale making them solid bet over the long term.
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