Growth stocks can drive outsized returns for investors, making them much wealthier. Here are two businesses that are worth appraising.
Constellation Software
Long-term investors of Constellation Software (TSX:CSU) could have become millionaires! For example, the YChart below shows that an initial investment of $10,000 held until now would be worth north of $2.5 million. Of course, Constellation Software is a prime example of growth stocks. Nonetheless, it demonstrates that serious wealth can be made from buying and holding the right stocks – stocks that are driven by real business results.
CSU Total Return Level data by YCharts
So, what does Constellation Software do? It acquires, manages, and builds vertical market software businesses. Generally, these businesses provide mission critical software solutions that address the specific needs of its customers in particular markets. This strategy has enabled the tech company to make durably growing cash flows and revenues.
Since 2020, its revenues have roughly doubled to US$7.9 billion, while its operating income has increased by 65% to US$1.2 billion due partly to the operating margin compressing to 15.3% (from 18.6%). Its adjusted earnings per share rose by about 80% in the period. Solid business execution over time is what has driven new highs in the stock recently.
Investors who already own the top tech stock would probably be smart to continue holding the shares. At the recent price of $3,663 per share, the stock is about fairly valued. Interested investors might buy a small position now and add more on any market weakness. Remember that you can opt to buy partial shares on platforms like Wealthsimple.
Dollarama
Dollarama (TSX:DOL) seems to be another keeper. When a stock outperforms the market in the long run, it is generally a good sign. In the last decade, an initial $10,000 investment of Dollarama stock has transformed into about $78,670 for annual returns of 22.9%, trumping the Canadian stock market returns of 7.8% in the period.
DOL Total Return Level data by YCharts
The value retailer particularly attracts consumers in today’s higher inflationary environment in which many people have to tighten their belts. The business should also be resilient through the economic cycle even during recessions. For example, in the pandemic-triggered recession in 2020, Dollarama actually increased its earnings, though at a slower pace than in normal economic environments.
Since fiscal 2021, Dollarama has increased its revenues by about 42% to $5.7 billion, while its operating income has increased by 60% to $1.4 billion due partly to the operating margin expanding to 23.7% (from 20.9%). Its adjusted earnings per share rose by about 91% in the period. Strong management execution and its leading market position in Canada are what have driven new highs in the stock recently.
At the recent price of $104 per share, Dollarama appears to be fully priced at a price-to-earnings ratio of approximately 30. Same as Constellation Software stock, Dollarama stock seldom sells at a discount. Investors might just have to hold their noses and dive in by easing into a position. Otherwise, interested investors can try to buy some shares on market weakness.
It’s hard to buy back solid growth stocks once you sell because they tend to go higher over time. In the case of Constellation Software and Dollarama, they certainly seem to be solid growth stocks that are worth keeping for long haul wealth creation.
