After declining for three consecutive days of trading, the S&P/TSX Composite Index is down by almost 4% from its 52-week high at writing. The downturn in the Canadian benchmark index indicates more issues for the broader market in 2023.
Despite the decline in the equity market index, savvier Canadian investors seeking growth stocks might find good opportunities.
Investing in the stock market is riskier during downturns. Allocating any money to growth stocks is out of the picture for most investors in times like these. While the broader market is experiencing a decline, one stock has been outperforming the Canadian stock market by a significant margin this year: Constellation Software Inc. (TSX: CSU).
Today, we will take a closer look at Constellation Software to help you determine whether it might be a good stock to buy right now.
Constellation Software in 2023
Investing in tech stocks took a backseat in 2022 as the tech sector meltdown resulted in massive sector wide sell-offs. The uncertainty and volatile nature linked with growth stocks combined with macroeconomic issues to trigger the sell-off. Amid market downturns and volatility, investors prefer investing in recession-resistant assets to offset potential losses.
Constellation Software stock has been outperforming the stock market so far in 2023. As of this writing, the stock is up by 24.9% year to date as opposed to a 4.8% year-to-date uptick for the broader market. The stock’s strong performance can be attributed to a slight resurgence for tech stocks this year after a weak year in 2022.
As the tech sector makes a comeback, major tech stocks like Constellation Software stand to benefit significantly. Trading for $2,658.46 per share at writing, Constellation Software stock is near its all-time high and up by 49% from its 52-week low.
What does it do?
Constellation Software is unlike many other major players in the tech space. Acting more like a venture capital firm, Constellation Software is a technology holding company. The $56.3 billion market capitalization company specializes in acquiring small tech businesses and helping them grow under its banner, fueling its own growth.
Instead of investing in startups, CSU focuses on small tech businesses already generating revenue. After the acquisition, it boosts the company’s performance.
Primarily acquiring enterprise companies, Constellation has a penchant for identifying companies selling vital software that helps other companies manage operations better.
While it might not be the most exciting way to play the technology space, Constellation Software stock’s strategy has delivered immense success over the years. With the tech sell-off making more acquisitions possible, it was only a matter of time till CSU stock climbed to new all-time highs.
Foolish takeaway
Constellation’s successful acquisitions resulted in its revenue increasing by 34% in its recent-most quarter, year over year. It also generated $152 million in net income (up by 23%), $400 million in cash from operations (up by 17%), and $290 million in free cash flow (up by 8.8%). Its successful acquisitions-based strategy delivered these stellar results.
However, Constellation Software is an expensive stock. At current levels, it trades for 6.2 times sales, and its price-to-book ratio of 24.1 is high. While more expensive than the average stock in the market today, CSU stock is not as expensive as its peers in the tech sector. Constellation Software stock looks very stable and offers much less uncertainty than most tech stocks.
As it hovers close to its all-time highs, it might not be a good investment for immediate outsized returns. However, it can be a good addition to your portfolio if you have a long investment horizon.
