Constellation Software (TSX:CSU) is one of the greatest stocks in Canadian history.
Since 2006, the year it went public, shares have risen by an astounding 8,495%. A $5,000 investment would have become more than $400,00. If you had the audacity to invest $100,000, you’d have more $8.5 million today.
Here’s the best news: Constellation Software is just getting started. New investors can still get rich by trusting its tried-and-true formula for success.
Here’s the secret
As its name suggests, Constellation Software is a software company. This alone puts it in position for success. Many of the most valuable companies in history are, at their core, software businesses. This includes Amazon, Microsoft, Facebook, and Alphabet.
Some software stocks are flashy. Others stay under the radar. This is an example of the latter.
Go to Constellation’s website, and you’ll notice something peculiar: it looks like it was made in 1999. How could a company worth $34 billion, which operates a digital-first business, have such a lame website?
The most important thing to know is that Constellation doesn’t cater to consumers like you or me. This business is all about enterprise customers. That’s a big reason why very few people have ever heard of the company.
Business customers are the focus, but it goes much further than that. Constellation Software specifically focuses on niche and mission-critical products. Let’s break those down.
Niche sounds like a bad place to be. Wouldn’t you rather focus on bigger opportunities? That, however, is where the competition is. If you stay niche, competition falls tremendously, providing better retention rates, lower selling costs, and better pricing power.
Mission-critical, however, is equally as important. If you run a business and use a piece of software to automate a mission-critical process, is that really something you want to mess around with? This only compounds Constellation’s pricing power and retention rates. Plus, because these products are niche, there often isn’t a single competitor to switch to.
Should you buy Constellation Software stock?
An important thing to know is that Constellation relies on acquisitions to build its product portfolio. It finds independent software companies that are overlooked, purchasing them at attractive multiples. Management feeds them into its broader portfolio, reducing costs while realizing positive free cash flow quickly.
All this stock needs to continue its impressive run is to rinse and repeat its proven strategy. Will it succeed? All signs look positive.
In 2008, Constellation Software posted returns on invested capital of 33%. A decade later, returns were still roughly the same. The business has grown rapidly, but a strict discipline on capital allocation has proven an ability to scale.
If acquisition candidates suddenly dry up, expect management to act rationally.
“Even if re-investment opportunities become scarcer, Constellation doesn’t end … it will continue to be a good (hopefully great) perpetual owner of its existing VMS portfolio, and will still deploy some capital opportunistically,” notes the company’s CEO and founder.
Of course, it would be great to jump into a time machine and buy Constellation stock before its incredible run. But new investors still have a reason to trust this long-term winner.
