3 Reasons This Tech Stock Should Be in Your Portfolio

CGI Group Inc. (TSX:GIB.A)(NYSE:GIB) doubled its stock price in fewer than four years. Here are three reasons to keep it in your portfolio for another four years.

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Are you familiar with the Rule of 72? It’s the number of years it takes to double your investment in a stock based on a specific percentage return.

For example, Montreal-based IT services provider CGI Group (TSX:GIB.A)(NYSE:GIB) has a five-year annualized total return of 19.3% through January 9. Divide that into 72 and you get 3.75, which means CGI stock doubled in fewer than four years.

How good is that?

The S&P/TSX Composite Index had a five-year annualized total return of 4.73, which means if it were to continue at that pace, it would take slightly more than 15 years for the value of the index to double.

So, yes, it’s very good.

If you’re lucky enough to be a CGI shareholder and have held its stock for the past four years, give yourself a pat on the back. If you haven’t owned CGI stock before, here are three reasons why it ought to be in your portfolio.

It’s listed in the U.S.

Except for the currency issue, I don’t understand why international companies like CGI dual list. The cost is redundant, in my opinion.

On December 14, CGI celebrated 20 years on the NYSE. Since joining the exchange, CGI has seen its revenues grow 15-fold and its earnings by a factor of 30.

Founded in 1976, CGI has grown to become the largest IT services provider and consultant in the world. Institutional investors don’t have a problem beating a path to its door despite being based in Quebec.

Twenty years ago, when it was a much smaller company, CGI looked at the bigger picture and realized that if it wanted to become a world leader in its field, its stock needed to be listed on a bigger stage.

Ever since this big decision in 1976, it’s dreamed big. That’s the hallmark of a growing company.

Strong financials

In December, Fool contributor Karen Thomas laid out her argument why CGI ought to be in your portfolio. High atop her list of reasons was the company’s solid EBIT margins, which were 14.8% in the latest quarter, 60% higher than in 2009.

A month earlier, I’d harped about the same thing, suggesting that CGI’s free cash flow generation made it an excellent stock to own. In 2018, CGI grew free cash flow by 12% to $1.3 billion.

Paying no dividend, CGI uses the free cash flow to pay down debt, repurchase shares, and make acquisitions. In 2019, CGI is focusing its capital allocation on share repurchases rather than debt repayment.

Given the company finished fiscal 2018 with net debt of $1.6 billion, or just 19% of its capitalization, and free cash flow at record levels, I think it makes sense to bring down the share count.

Despite the performance of its stock in 2018 — it was up 22% for the year, giving it a decade of calendar gains — CGI’s stock still trades at a reasonable 18 times its 2019 earnings.

Tuck-in acquisitions

While CGI needs to improve its organic growth, there are very few companies that make and integrate acquisitions as well as CGI does. It made three in 2018 that cost the company $277 million.

It has an uncanny ability to buy small- and medium-sized IT businesses and integrate them into CGI without losing its shirt.

“The organic growth rate is fairly tepid at between one and 3%,” Brian Madden, senior vice president and portfolio manager at Goodreid, told BNN Bloomberg recently. “[But] that has been accelerating recently and their tuck-in strategy has also been working nicely, where they buy niche companies to add capabilities or to fill in a geographic void, and that’s helping to bolster their organic growth.”

Successful businesses like CGI turn over every rock in search of ideas, businesses, strategies — anything to grow organically. And when you’re not doing it using internal sources, acquisitions can be a way to get a business unstuck.

I continue to like this Canadian tech stock that gets no respect.

Should you invest $1,000 in Air Canada right now?

Before you buy stock in Air Canada, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Air Canada wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $20,697.16!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 29 percentage points since 2013*.

See the Top Stocks * Returns as of 3/20/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Will Ashworth has no position in any stocks mentioned. CGI Group is a recommendation of Stock Advisor Canada.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Tech Stocks

The letters AI glowing on a circuit board processor.
Tech Stocks

How I’d Allocate $10,000 to AI Stocks in Today’s Market

Shopify (TSX:SHOP) is one of Canada's most compelling AI stocks.

Read more »

Canada day banner background design of flag
Tech Stocks

The Top Canadian Stock to Buy With $5,000 in 2025

There are few Canadian stocks out there that offer the outlook of this tech stock, bound for more growth.

Read more »

ways to boost income
Tech Stocks

How I’d Invest $11,500 in Canadian Fintech Stocks to Revolutionize My Finances

Propel Holdings stock's recent dip could be a trading opportunity for long-term financial gains. Here's why the fintech stock is…

Read more »

Start line on the highway
Tech Stocks

Where I’d Invest $5,000 in Growth Stocks With Long-Term Potential Through 2030

DO you have $5,000 to invest to grow your wealth over the long term? These growth stocks could deliver strong…

Read more »

A shopper makes purchases from an online store.
Tech Stocks

Buy the Dip on the Return of Recession Stocks?

If a recession comes back, there are some stocks that could fair well afterwards. And this is one of the…

Read more »

data center server racks glow with light
Tech Stocks

April Opportunity: Where I’d Invest $7,000 in These 3 Tech Stocks Right Now

These tech stocks have solid growth potential and are trading at discounted valuation, providing a solid buying opportunity in April.

Read more »

The letters AI glowing on a circuit board processor.
Tech Stocks

If I Could Only Buy and Hold a Single U.S. Stock, This Would Be It

You don’t need 40 different stocks to build wealth. A few good ones can boost your portfolio, and this U.S.…

Read more »

cloud computing
Tech Stocks

2 Top Canadian Information Technology Stocks to Buy Right Now

These two Canadian information technology stocks are bargains amid the downturn in the broader market for long-term investors.

Read more »