TC Energy (TSX:TRP) is a popular income stock. Sure enough, it provides a mesmerizing dividend yield of close to 7.2% based on its recent price. In the long run, it has also outperformed the Canadian stock market. However, Constellation Software (TSX:CSU) has made far more millionaires than TC Energy.
In fact, based on the graph below, an initial investment of $10,000 in Constellation Software transformed its very long-term investors into multi-millionaires! Of course, I’m cherry-picking the tech stock. Interestingly, most of the time, it appears to be expensive, trading at a high multiple.
TRP, CSU, and XIU Total Return Level data by YCharts based on initial investment of $10,000
At about $3,285 per share at writing, many investors would be scared away from the stock because of the pricey-looking price tag, especially when comparing to TC Energy’s stock price of $51.76 at writing. On a closer look, Constellation Software trades at a price-to-earnings (P/E) ratio of about 39 versus TC Energy’s P/E of about 12.2.
Investors should understand that the market prices Constellation Software at a high P/E because the company is expected to experience higher growth. In other words, Constellation Software is priced as a growth stock, whereas TC Energy is priced as a value stock.
Hitting the right opportunities in growth stocks allows investors to score big and improves their chances of making a million dollars. Given Constellation’s higher growth potential, investors should have a higher probability of becoming millionaires by investing in it on dips.
Specifically, in the past decade, Constellation Software increased its adjusted earnings per share by approximately 24% per year. In comparison, TC Energy’s adjusted earnings per share growth rate was only 6.6%.
To be clear, it’s still possible to become a millionaire by investing in TC Energy. However, investors would need to invest much more of their money in the value stock versus a growth stock like Constellation Software. Does this mean investors should flock to growth stocks and forget about value stocks entirely? Not necessarily.
The returns from value stocks can be more reliable because more of their returns come from the dividends. Investors can check closely on the safety of the dividends to ensure this portion of the returns is dependable. For example, they can ensure the underlying businesses have good financial health, solid balance sheets, long track records of healthy dividend payments, and that the current dividends are secure.
Investors should know that the high growth in growth stocks can’t last forever. At some point, high-growth businesses turn into slower-growth and mature businesses, unless they find a new avenue of explosive growth.
In the case of Constellation Software, much of its growth comes from mergers and acquisitions (M&A). If the market is not healthy for M&A activities, it cannot find fitting acquisitions, or it grows so big that the acquisitions it makes don’t make a sufficient impact, then its stock multiple can slide quickly.
Constellation Software’s M&A activity weakened in the last few years, but it still managed to deliver a return on invested capital of 14-18% per year since 2021, which still pales to the roughly 27-28% level achieved in 2019-2020. Investors of Constellation Software should, therefore, be watchful of its M&A activities.
