Finding TSX stocks that can multiply returns for you is no easy task.
Firstly, you must pick a stock in a great business that can compound earnings/cash flows at consistent, high rates of returns.
Secondly, you have to hold onto that stock for years and even decades. At times, you will need to hold through massive drawdowns and gut-wrenching business challenges along the way.
Finding multi-bagger stocks takes a combination of great stock picking and incredible patience/investment fortitude.
This TSX stock has turned $10,000 into $1 million
One TSX stock that would have certainly been worth sticking with for years is Constellation Software (TSX:CSU). An initial $10,000 investment in Constellation stock in 2008 (15 years ago) would be worth $1.17 million today.
In hindsight, that looks like a very easy investment given how well Constellation stock has performed over the years. It has returned an approximate 30% compounded annual growth rate over the past decade.
However, in 2008, this stock only traded with a market cap of $525 million at the time. It was relatively unknown, and it had a chief executive officer who was largely untested.
The power of smart capital allocation on display
It has a conglomerate of boring niche software businesses that were not nearly as exciting as horizontal software/hardware stocks like Microsoft or IBM at the time.
Constellation’s businesses do not have large TAMs (total addressable markets). Yet it is the power of capital allocation that has helped project such incredible returns.
Constellation’s software businesses serve specific niche functions in niche business sectors. Given their essence to a market sector, these software businesses often are economically resilient and have low customer churn.
Likewise, these businesses tend to be acquired at significantly lower valuations than horizontal software businesses.
A lot of cash and a large runway to keep growing
Constellation can generate massive amounts of cash from these businesses. It takes this cash and then reinvests it into more businesses.
It has acquired over 1,000 software businesses over its life. It has a buy-and-never-sell mentality, so it has to purchase these businesses at attractive valuations.
Constellation has a database of over 50,000 businesses that it could potentially acquire. Even though this stock has a market capitalization of $60.7 billion, it still has substantial opportunities to keep growing. In 2023 alone, it has deployed over $2 billion into new software businesses.
This TSX stock continues to earn high double-digit rates of return on its acquisitions. Despite its massive growth record, the company can continue to compound its capital at high rates of return.
More spinouts and strong returns from this TSX stock ahead?
Recently, it has started to spin out parts of its business to shareholders. Last year, shareholders received shares of Topicus, which is replicating Constellation’s strategy in Europe.
This year, Constellation delivered shares of Lumine Group to the market. Lumine has a specific focus on specialized communications software.
Even though this TSX stock has turned $10,000 into over $1 million, it could continue to deliver attractive returns for patient shareholders.
This TSX stock is almost never cheap, but any decent pullback has been a great buying opportunity. For steady growth and consistent returns, Constellation Software is a great stalwart for any Canadian portfolio.
