Ryan Modesto, CFA, is CEO at 5i Research, a conflict-free investment research provider for retail investors offering research reports, model portfolios and investor Q&A, which is available to try for free. 5i Research provides content under an agreement with The Globe and Mail, which receives royalty compensation.
Much ink has been spilled about the FAANG stocks in the U.S. Whichever way you want to define this group, it typically includes Facebook, Amazon, Apple, Netflix, and Google (Alphabet) and refers to some of the best-performing companies in the United States, which dominate their respective industries and generate unheard of cash flows. As an example, Alphabet holds $102-billion in cash as of their latest quarter and generated $21-billion in operating cash flows in that quarter alone. Without some context, these numbers are so large they almost become meaningless. To help put that into perspective, the entire GDP of British Columbia as of 2014 was estimated to be $224-billion.
With as much as we talk about the FAANGs, top-performing companies in Canada tend to get overlooked. Yet they have been posting sneaky-but-stellar performance over the last few years. Let’s coin this group of “Canadian FAANGs” as the “DOCKS.”
- Descartes Systems (DSG) – In a similar industry to Kinaxis (discussed below), Descartes offers logistics solutions through a technology platform that allows companies to manage increasingly complicated processes such as customs filings, fleet management and document management. The company is known for its sticky revenues and has returned 41 per cent in the last year and 273 per cent over five.
- Open Text (OTEX) – While slower-growing than the other DOCKS, Open Text could perhaps be compared to Apple, at least in terms of its lower relative valuation. The enterprise-management company sports a price-to-earnings ratio of 13 times, has returned 13 per cent in the last year and 110 per cent over the last five years.
- Constellation Software (CSU) – This is one of our favourite names at 5i Research and one we have held in our model portfolio for years. CSU has a management team that will likely go down as one of the best in Canada. The company has done a great job buying smaller companies, finding efficiencies and sharing resources and know-how in order to improve its operations. CSU has returned 55 per cent in the last year and 612 per cent over the last five.
- Kinaxis (KXS) – The rarely-talked-about Kinaxis offers cloud-based supply chain and logistics solutions and serves companies with global operations, such as Toyota. KXS has returned 16 per cent over the last year and 640 per cent since it began trading on the TSX.
- Shopify (SHOP) – Shopify essentially provides a digital storefront for small- and medium- sized businesses while also developing an institutional product for larger companies. The company also has value-added services to help make entrepreneurs’ lives easier. SHOP has returned 96 per cent over the last year and 622 per cent since it went public.
While this group of companies may not match the FAANGs in size, they certainly are competitive in returns. Over three years, owning an equal-weight basket of these stocks has returned just shy of 290 per cent. Meanwhile, the Canadian tech ETF XIT has had what is still a stellar run, up 167 per cent over three years but still shy of performance of the DOCKS.
So why have we chosen these companies, in particular? Because they have all seemed to carve out a dominant position in their respective spaces, continue to beat market expectations, their operations are growing and they have been some of the best-performing stocks on the TSX over long- and shorter-term periods. While they may not be in your face on a day-to-day basis like Facebook and Amazon, all of these companies are leaders and continue to build scale in their industries.
As always, just because these names have done well in the past does not guarantee they will continue to do so in the future. That said, they aren’t showing signs of letting their foot off the gas quite yet. Some investors may not have even heard of some of these companies, but if a portfolio does not have any exposure to the DOCKS, it may be missing out on some of the best companies in Canada and, in some cases, even North America.
The author holds a position in Amazon and Apple. Employees of 5i Research cannot trade in individual Canadian stocks in order to remain conflict-free.