Constellation Software (TSX:CSU) Stock Could Double 1 More Time

Constellation Software (TSX: CSU) stock is incredible. If you invested $5,000 in 2006, you’d have nearly $500,000 today. That’s 100 times your original bet.

There’s only one questions left: will shares double yet again?

This is your big chance

They say that the best time to plant a tree is 20 years ago. The second best time is today. The same holds true for Constellation stock. While you may have missed its extraordinary rise, there’s still time to profit.

The main thing you must understand is that the company’s economics are incredibly attractive. As its name suggests, Constellation sells software, but not just any software. The company specifically focuses on products that are both niche and mission critical. Those two characteristics are the magic ingredients behind the soaring stock price.

“Niche sounds like a bad place to be,” I once explained. “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.”

The magic of Constellation’s niche products is only amplified when those products are also mission critical.

“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,” I stressed.

This is simply a magical company. It’s discovered a recipe for success that can be repeated over and over again. The historical share price action is proof of that.

You can profit with Constellation stock

Let’s get this out of the way first: the biggest gains always accrue to the earliest investors. Constellation stock likely won’t produce 10,000% gains again, but there’s still plenty of upside left to go.

The company’s chief form of growth is by making acquisitions. The niche, mission-critical software market is highly fragmented, stuffed with thousands of small offerings. All the company needs to do is use its cheap access to capital to buy the fragmented competition. Because the acquisitions are so small, valuations are typically favourable.

Constellation simply repeats this acquisition process ad infinitum. In a weird way, the company actually benefits during a bear market, as acquisition prices fall. During a bull market, shares rise due to higher profitability. It really is an investment for all markets.

Just look at the company’s performance during the 2008 financial crisis. CSU shares actually rose in value! That’s what you get with a magical business model like this.

Expect these returns

Constellation stock continually achieves returns on capital above 20%. That’s incredible for a $30 billion business after decades of rapid growth. This is simply one of the best-managed businesses in Canada, perhaps the world. I expect they’ll continue to execute in the decade to come.

To be sure, shares aren’t cheap right now. They trade at the high end of their historical range. But good companies nearly always command a premium. Even at current multiples, I’d still expect double-digit annual returns from this stock over the next decade and beyond.