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Young Investors: 1 Cheap Canadian Technology Stock That Could Soar

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Written by Joey Frenette at The Motley Fool Canada

Canadian technology stocks are remarkable in their own right, even if they don’t get as much attention as the innovators over in Silicon Valley. Indeed, Canada’s tech scene is worth a look if you’re a Canadian investor who seeks impressive growth over the next several years. Of course, there’s always the red-hot tech stocks in the U.S. that you could go after. They provide more broad exposure to the tech scene.

In any case, the falling Canadian dollar may be enough of a reason to stay on this side of the border when it comes to your next tech buy. Indeed, the greenback has really outmuscled the loonie of late. Whether that changes going into year’s end remains to be seen. As the U.S. Federal Reserve (the Fed) continues to stay hawkish when it comes to inflation, don’t expect the loonie to reverse course anytime soon.

The case for sticking with TSX stocks as the loonie sinks

Though the Bank of Canada is still keeping rates high, it’s unclear as to whether rate cuts will be in the cards, at least not until we have ample evidence that inflation can be put away and won’t be in a position to make any sort of comeback. Indeed, inflation has lingered like cigarette smoke in recent quarters. As central banks do away with what remains of it, I do think it’s prudent to keep an environment where inflation has zero hopes of making a resurgence.

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A high-rate world doesn’t bode well for technology firms, especially those that spend a lot on growth, with not much in the way of earnings to show for it. Still, I think investors should look, not at the past, but at the future, when it comes to the true innovators. When you look at the next two or even three years out, some of the tech firms that look expensive today may actually be in a spot to look cheap in retrospect.

Shoot for the stars with this Canadian tech stock!

Take shares of Constellation Software (TSX:CSU), which do not look like a bargain at this juncture. Not while it goes for more than 84 times trailing price-to-earnings (P/E). Based on the P/E ratio alone, it’s easy to dismiss Constellation as overvalued.

Still, I do believe Constellation is a growth company that can “grow” into its high multiple. How? The company is a master at acquiring firms within its small circle of competence.

Indeed, Constellation can find value in small caps with market caps of less than $1 billion. Though you could bet on micro-cap Canadian software companies yourself, I’d bet you wouldn’t be able to find the risk/reward balance that Constellation has been able to generate. Indeed, small-cap investing can be risky. Fortunately, Constellation has the expertise to minimize risk while maximizing reward.

The result? High double-digit annual growth that’s unlikely to slow considerably anytime soon.

With all that in mind, it’s clear Constellation stock is a bargain that’s disguised as a pricey, overvalued play in the tech industry. Yes, Constellation may be trickier to value. Growth plays always tend to be. Regardless, I do view CSU stock as a Canadian technology company that may have more to offer to growth-focused investors than some of Silicon Valley’s best.

The post Young Investors: 1 Cheap Canadian Technology Stock That Could Soar appeared first on The Motley Fool Canada.

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Fool contributor Joey Frenette has no position in any of the stocks mentioned. The Motley Fool recommends Constellation Software. The Motley Fool has a disclosure policy.

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