Finding a top growth stock with abnormal market-beating potential is what most investors are after. Finding two or three would be great as part of a well-diversified portfolio.
Now, the market is a real-time pricing machine, valuing a given company’s prospects via the wisdom of crowds. So, finding price dislocations in the market is hard. And many of the best growth stocks with market-beating growth potential such as Constellation Software (TSX:CSU) have certainly been valued as such. This is a company with a valuation multiple of roughly 100 times earnings, so it’s far from cheap.
That said, I think there are reasons why this stock is worth this valuation and why the company could be fairly valued presently. Let’s dive into what makes Constellation Software worth considering, even at these heightened multiples.
Strong growth driven by secular tailwinds
Finding a company like Constellation Software with a durable competitive advantage in its core area of expertise is great. The company continues to acquire smaller and mid-sized software companies, scaling up its overall offerings while providing added value to its customer base.
The network effects Constellation has created over the years allow the company to boost the return on invested capital of its acquisitions, effectively meaning that the more deals the company makes, the better growth it will see.
However, the company is also seeing strong growth organically, providing a relative level of stability when it comes to growth that other software companies can’t.
Strong performance appears poised to continue
From a price-performance perspective, investors need only look at the stock chart above to see what kind of effect holding shares of CSU stock has had for a portfolio over the past five or 10 years. Simply put, this company is a compounding machine, and I don’t expect those dynamics to change anytime soon.
Constellation has seen its share price surge roughly 22,000% since 2006. In other words, $1,000 invested in this company for a little less than 20 years may now be worth around $220,000. That’s a very large sum, and while those results may not necessarily be repeatable moving forward (given the company’s size), the growing overall TAM Constellation Software is pursuing continues to grow as well. So, we’ll see.
I think that there are fundamental and secular tailwinds supporting Constellation’s growth profile that are unique. This is an acquisition-heavy company that’s dialing in its efficiency and could see continued growth so long as earnings per share numbers continue to come in ahead of expectations.
Constellation Software is a buy
As far as growth stocks I’d focus on for a TFSA holding or similar growth account, Constellation Software has to rank near the top of the list. This is a company I think has among the best business models in the software space and should be a key beneficiary of other trends taking place right now (ahem, artificial intelligence) to a greater degree than most Canadian stocks.
For those willing to take a shot at a TSX-listed growth stock, Constellation is worth a look right now.
