Constellation Software (TSX:CSU) is a stock that I am very bullish on. Oddly enough, many Canadians don’t know about this company. That’s because Constellation Software isn’t a company that you’d really encounter in your day-to-day life. No, you’d really only know about this company if your workplace were acquired by it or if you’re a seasoned investor. Despite its lack of recognition by the broader population, it’s a stock that I think Canadians should know.
If you had invested $1,000 in this stock five years ago, do you know how much you’d have now? That investment would have turned into $2,085. Yes, as of this writing, Constellation Software stock has gained 208.5% over the past five years. That represents a compound annual growth rate of 25.3%. To put that into perspective, the TSX has only gained 32% over the same period.
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What is Constellation Software?
So, what exactly is this company? Well, Constellation Software is an acquirer of vertical market software (VMS) businesses. For much of its history, Constellation Software has focused on small- and medium-sized VMS businesses. Clearly, its decision to do so was a very good one. Constellation Software established itself as a leader in its space and grew into one of the largest VMS acquirers in the world.
Since 2021, the company has expanded its scope to include the acquisition of large VMS businesses. Still operating according to its proven playbook, Constellation Software’s efforts have shown to be successful yet again. The stock continues to grow off the back of its acquisitions of companies like WideOrbit.
Why is this company so successful?
In my opinion, what makes Constellation Software so successful is its acquisition strategy. This company requires businesses to be the best of the best in order to be acquired by it. For example, a potential acquisition needs to have an outstanding manager, consistent profitability, and above average growth. It also wants potential acquisitions to be a clear leader, or number two player, in its respective vertical market.
By sticking to those strict requirements and being intelligent about capital acquisition, Constellation Software has been able to consistently grow its business at a very fast pace.
In addition to that outstanding growth strategy, Constellation Software continues to be led by its founder, Mark Leonard. It’s been previously shown that founder-led companies tend to outpace returns generated by companies led by non-founders. Constellation Software is no different. In my opinion, as long as Mr. Leonard continues to lead this company, Constellation Software is an easy buy for any growth portfolio.
Foolish takeaway
There are many outstanding tech stocks in Canada. There are also many companies that could generate handsome returns over the long run. But there is only one Constellation Software. If you’re serious about growth, then don’t ignore this stock. It has turned $1,000 into $2,085 over the past five years. I think it can continue to generate great returns over the next five years.
