Many investors looking to generate wealth turn to tech stocks. This makes sense to me since tech stocks often operate at the boundaries of what we’re capable of. Because of that nature, a lot of disruption tends to come from these companies. Of all the tech stocks you can invest in, I think Constellation Software (TSX:CSU) stands out as one of the clearest no-brainer stocks. In this article, I’ll tell you why.
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What is Constellation Software?
Although I think this is a great stock that every growth-minded investor should have, relatively few Canadians actually know about this company. If you’re one of those people, then don’t worry. The reason many Canadians don’t know about Constellation Software is because it doesn’t operate a consumer-facing business.
So, what does Constellation Software do? It acquires vertical market software (VMS) businesses. In summary, unless your employer is acquired by Constellation Software, you likely won’t have ever interacted with this company. For much of its history, Constellation Software has focused on small- and medium-sized VMS businesses. This is because the company’s leadership (which we’ll get to later) strongly believed that it could find better deals in small- and medium-sized businesses.
However, in 2021, Constellation Software’s president and founder, Mark Leonard, announced that the company would begin targeting large VMS businesses for acquisition. In my opinion, that was a major shift in the company’s operations and was a potential catalyst for this stock.
Why is Constellation Software a no-brainer tech stock?
Now, we can finally get to the good stuff. What makes Constellation Software a solid investment is its proven acquisition strategy. The company lays out its criteria in broad daylight on its website. Essentially, you need to be a strong company with above-average growth, consistent profitability, and outstanding management.
By sticking to its acquisition strategy, Constellation Software has been able to grow at a very fast rate for many years. This is reflected in the company’s stock price. Since its initial public offering (IPO) in 2006, Constellation Software stock has gained nearly 20,500%! That means a $10,000 investment made around its IPO would be worth nearly $2 million today.
I think Constellation Software’s decision to begin targeting large VMS businesses for acquisition was also a great decision. It shows that the company remains committed to growth and is looking for new ways to create value.
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When would Constellation Software not be a good stock?
In my opinion, it’s always a hit to a company when its founder leaves. I think that’s the case here, too. Although I believe that Constellation Software could continue to operate long after Mark Leonard retires, I also think that a lot of investors could take that as a reason to pull money out of the stock.
Investors should also keep an eye on business developments. If Constellation Software changes its business model dramatically, it could spell disaster for the company. However, given its long history of following a very similar approach to acquisitions, I imagine that risk to be very low.
