One thing that annoys most Canadian investors about the Tax-Free Savings Account is the small contribution room that comes along with the account. However, there is a simple way around it. Solid growth stocks can help investors undermine the impact of contribution room limits via accelerated growth.
One such stock, Constellation Software (TSX:CSU), has offered exceptional performance since inception. This is a stock I think could be poised for very strong long-term performance, despite the company’s rather incredible rise in recent years.
Here’s more on why I think Constellation Software is a top growth stock to buy for investors seeking outperformance over the coming 5 to 10 years.
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Where growth comes from matters
For Constellation, a leading private enterprise software company, this rally really shouldn’t be unexpected. The fact that this company focuses on building and managing industry-specific software, which provides mission-critical services to its customers, inherently positions investors for big returns over the long haul. The sort of organic growth Constellation has seen is remarkable, and likely to continue, given the company’s existing operating model.
However, what I like most about Constellation is its focus on growing via acquisitions. This model, whereby Constellation has identified hundreds of small companies in its sector and consolidated them within its portfolio, has yielded incredible results. Given how fragmented this space is, the runway for growth driven by acquisitions is massive. Until founders stop launching tech startups, and companies like Constellation buy them out and increase their returns on equity, this is a company with the potential to soar long-term.
The numbers back up this growth story
It’s one thing to say that a company will do x or y. Constellation has continued to show it can grow at an incredible rate, and maintain this growth for a long time. That’s partly why the stock is trading at more than 100 times trailing earnings.
However, I do think Constellation’s multiple makes sense in the context of its 33.5% profit growth on a year-over-year basis. This growth rate compares to a 1.9% industry profit growth average, suggesting Constellation is a unicorn that has the potential to continue providing outsized returns over the long term. This is the kind of multiple investors may prefer, over a beaten-down tech company with a lack of prospects for profitability right now.
Over the long term, I think Constellation Software is among the top choices for delivering proven performance. Given its sound financials, consistent growth, and competitive position in the thriving industry, it is an attractive stock and relatively stable in the high-growth tech sector. For those looking to take advantage of the tax benefits a TFSA provides, this would be among my top picks on the TSX to consider right now.
