Constellation Software Stock: Buy, Sell, or Hold?

Unveiling the Code: Should you Buy, Hold, or Sell Constellation Software (TSX:CSU) stock at current levels?

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Are you an investor evaluating growth stock opportunities on the TSX and interested in technology giant Constellation Software (TSX:CSU) stock as it prints new all-time highs beyond $3,750 per share? Naturally, you’re wondering whether it still has any potential upside momentum. Or perhaps you have been holding the winning stock for some time and are fighting temptations to sell and book some profits. While the ultimate Buy, Hold or Sell decision should be guided by your investment strategy. These three potential decision routes may be worth exploring.

Let’s take a dive.

Why buy Constellation Software at all-time highs?

Constellation Software is a $59.3 billion technology stock that has established itself as a perennial and consistent winner. Founded by a former venture capitalist with superior skills in the bargain buying of small software companies with unique product offerings serving niche markets, the company has become a smorgasbord of high-margin software businesses with stable revenue and resilient cash flow streams. The businesses’ combined moats make Constellation Software a fortress every tech investor wishes to own a piece of.

Most noteworthy, the company continues on a steady path to growth. A recent increase in its acquisitions appetite to include larger businesses could quicken its growth path. If we view Constellation Software as a publicly listed fund management company, the fund manager is going bigger on deals in a familiar market it has traversed for decades.

Keeping with the fund management theme, Constellation Software becomes more valuable each time it grows its assets under management. This time, the assets are the companies it acquires at cheap valuations in the private equity market. For this reason, Constellation Software’s top-notch management remains a key factor that sustains the tech giant’s premium valuation.

Despite its fine run, CSU stock still appears fairly valued today. Shares spot a forward price-to-earnings (Forward P/E) ratio of 35. Bay Street analysts project a further 39% growth in its earnings per share over the next five years, and a price-earnings-to-growth (PEG) ratio of 1.0 implies CSU stock is fairly valued given its future earnings growth potential. You could still earn a positive return on a new investment today.

Since going public in 2006, CSU stock has turned a $1,000 investment into more than $250,000 today, dividends considered. Shares retain strong upside momentum – an attractive attribute that has remained true for decades.

And winners usually keep winning.

Reasons for holding onto CSU stock

Legendary investor Warren Buffett once said his best holding period is forever. He could be right, long-term investing has historically compounded wealth for patient investors.

Constellation Software stock could preserve, and steadily growth your wealth, even as the business matures into a slower growth mode. The company is most likely to keep its moats and retain its sticky recurring cash flow sources for many more years, compelling investors to hold onto its common shares for much longer.

Further, if the winners keep winning, you could experience painful regret after selling the outperformer, if shares keep rising. Regret is a genuine psychological issue that can affect long-term investment portfolio construction. Constellation Software stock is a keeper. It’s a proven compounder many regret ever selling over the past years.

Time to Sell?

Although CSU stock remains fairly valued following a multi-year rally, the company’s decision to include larger businesses into its acquisition’s universe could mean slower earnings growth and increasing financial risks, necessitating some profit-taking “SELL” trades on the appreciated asset.

Acquiring larger targets requires lower return hurdles and narrower margins of safety on acquisition deals as management engages larger negotiating teams with more bargaining power. Superior returns realized on earlier small deals could be gone. And the new deals, which come with increased borrowing (leverage) may increase risk more than they contribute to earnings growth.

It’s a noble investment decision to sell high after buying low, any day. Taking some profits is good for your wallet.

Most noteworthy, if the stock has become a significantly large investment relative to other assets in your total portfolio, diversifying your holdings could be a noble risk management strategy, just in case something unexpected happens.

Still on that note, Constellation Software is a founder-led company that relied on the expertise and superior talent of its founder and management. If founder Mark Leonard abruptly leaves, investor uncertainty may shake CSU’s stock price.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Brian Paradza has no position in any of the stocks mentioned. The Motley Fool recommends Constellation Software. The Motley Fool has a disclosure policy.

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