One no-brainer Canadian stock to buy now and hold forever is Constellation Software (TSX: CSU). Despite a 25% decline from its highs this year, the tech stock returned 734% over the last decade.
This essentially transformed an initial investment of $10,000 into about $83,420. In other words, it was an eight-bagger in that period. Few stocks can match that.
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Why the weakness in Constellation Software stock
Reasons for the pullback include concerns about the impact of artificial intelligence (AI) and the stepping down of founder and long-time president, Mark Leonard, due to health reasons.
Other concerns might include the financial health of the company. Although its interest coverage has declined since 2022, its current ratio has improved, while its financial leverage has stayed at similar levels.
Here are some reasons that make Constellation Software a no-brainer stock to own for the long haul.
Vertical-market focus
Its focus on acquiring, managing, and building vertical market software (VMS) businesses that provide mission-critical software solutions to niche markets gives high pricing power, low churn, long customer lifetimes, and predictable recurring revenue.
To demonstrate its earnings power, its 10-year revenue and earnings growth were a compound annual growth rate (CAGR) of 22% and 24%, respectively.
Decentralized operating model
It acquires small businesses while keeping their independence and entrepreneurial managers, allowing them to stay agile and keep their culture. Simultaneously, Constellation Software provides resources and expertise as needed.
Disciplined M&A strategy
It prioritizes mergers and acquisitions (M&A) in founder-led businesses with dominant market share and high profit potential. And it reinvests their cash flow for more fitting acquisitions.
This is a scalable “buy and build” strategy that maintains a long-term, buy-and-hold model to continue growing its revenue and cash flow stream. Simply put, it’s a self-sustaining growth engine.
Exemplary capital allocation
Management allocates strong free cash flow into acquiring high-return niche software companies at sensible prices and prioritizes reinvestment that maximizes long-term return on invested capital (ROIC), calculated by net operating profit after tax ÷ invested capital.
To demonstrate its extraordinary capital allocation, its 10-year ROIC averaged about 23%, leading to return on equity (ROE), calculated by net income ÷ shareholders’ equity, averaged approximately 41% in the period.
Attractive valuation
After a meaningful correction that we have not seen in the wonderful business for a long time, the stock is attractively valued. At $3,950 per share at writing, the analyst consensus price target of $5,505 represents a hefty discount of about 28%. In other words, it implies 39% of near-term upside potential.
Investor takeaway
Here’s a famous quote from Warren Buffett: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
Given Constellation Software’s track record of execution, leading to incredible wealth creation for long-term shareholders, it is a wonderful company. Importantly, the stock has pulled back by a wide margin, making the wonderful business not at a fair price but at a wonderful price.
It makes the top tech stock a solid buy now to be held for a long, long time. For investors willing to accept the uncertainties, they can seize the opportunity to load up on some shares.
