RBC Capital Markets has released its RBC Strategy Canadian Focus List for 2022. There are 27 companies on the list.

We’ve pared it down to three less obvious names in software and manufacturing, which the analysts give 12-month potential upside of between 25 per cent and 28 per cent.

Maybe these stocks would fit nicely into your portfolio.


CCL Industries Inc. (TSX: CCL.B)

Price Target: $80

Investment summary

Manufacturing experience and innovation drive competitive advantage. While most of the company’s manufacturing equipment is purchased off-the-shelf and available to its competitors, CCL has developed expertise over time.

This expertise also includes knowledge in materials science, as it has developed capabilities in polymer extrusion, adhesive development, coating and lamination, surface engineering, and metallurgy that are deployed across all business segments.

This specialization makes it increasingly difficult for new entrants in the market to compete with the products and services that CCL is able to offer. Global manufacturing footprint a key differentiator.

CCL has a global footprint of more than 180 production facilities located across the globe, and it continues to expand in new markets.

The global nature of CCL’s footprint offers operational and administrative advantages for large, multinational companies, as they are able to rely on one labeling company.

Solid balance sheet means further acquisitions likely. CCL has been, and in our view will continue to be, a fairly acquisitive company. This is positive for the stock, as it has a balance sheet to support it.

The current leverage is well within a comfortable range for management and should be reduced quickly given the company’s solid FCF profile.

Potential catalysts include:

1) Materially accretive M&A

2) Turnaround in Avery

3) New apparel labeling contract with big retailer

Constellation Software Inc. (TSX: CSU)

Price Target: $2,700

Investment summary

We believe that Constellation Software is likely to generate one of the highest returns for shareholders over the long term in our coverage universe.

Our Outperform thesis reflects:

1) Constellation’s ability to rapidly compound capital through acquisitions

2) expected rebound in organic growth

3) Constellation’s valuation appears attractive

Constellation’s ability to rapidly compound capital through acquisitions. We believe that Constellation Software is likely to generate one of the highest returns for shareholders over the long term in our coverage universe.

Our outlook reflects the compounding of Constellation’s high hurdle rates, along with the scalable nature of Constellation’s decentralized business model.

Constellation has made changes to its business model to provide for the redeployment of capital at high rates of return. Additionally, the acquisition targets in Constellation’s database continue to grow (now at 40k, up from 1.2k in 2006).

The 40k acquisition targets imply a large $180B addressable market. Moreover, Constellation is pushing decisions for allocating capital further down into the organization.

Our outlook calls for Constellation to deploy $1.36 billion capital on acquisitions in 2021, up from $531 million in 2020. Expected rebound in organic growth.

Our outlook calls for Constellation’s constant currency organic growth to rise from -3% in 2020 to 2% in 2023. Our analysis shows that 83% of Constellation’s revenue stems from verticals which are likely to be resilient to COVID-19.

Additionally, recurring maintenance revenue accounts for 71% of Constellation’s FY20 revenue.

Constellation’s maintenance agreements are typically paid in advance for one year, which helps mitigate the potential impact of COVID-19-related disruptions.

Shopify Inc. (NYSE: SHOP; TSX: SHOP)

Price Target: $1,800 U.S.

Investment summary

Shopify provides a leading multichannel operating system for small-to-medium businesses (SMB) commerce, with product and vision driving differentiation in a crowded space.

Shopify has a number of catalysts that we expect to help accelerate revenue growth and expand the company’s long-term total addressable market, including:

  • Shopify Fulfillment Network (SFN)
  • Shopify Capital
  • Next-generation Point-of-Sale (POS)
  • International expansion

Potential catalysts

Shopify is a key beneficiary of the transition to e-commerce: We estimate Shopify has reached 1.9 million+ merchants on its platform, which is more than 5x the 325k merchants in 2016.

The transition from physical retail to e-commerce, adoption by larger brands and international expansion are helping fuel rapid growth in the gross merchandise value (GMV) on Shopify.

Our outlook calls for Shopify’s GMV to rise from $120 billion 2020 to $310 billion by 2023.

GMV take rate could increase with the addition of new merchant solutions:

  • The launch of the Shopify Fulfillment Network (SFN)
  • Expansion of Shopify Capital, and other new merchant solutions are likely to help increase
  • Shopify’s take rate for merchant solutions revenue.

Our outlook calls for Shopify’s take rate to expand from 1.69% in 2020 to 2.12% by 2023.

Operating leverage: Shopify has only started to realize operating leverage. We believe upside to revenue could drive a faster path to higher operating profits and increased free cash flow.

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