Have you ever wondered why some stocks are ideal Tax-Free Savings Account (TFSA) investments? Each stock has a different way of giving returns. Some are cyclical stocks that are buy-the-dip and sell-the-rally. Some are long-term growth stocks, which you can keep accumulating at every dip. They are the stocks to buy and hold forever and perfect for a TFSA, as this account allows you to withdraw your investment income tax-free.
This Canadian stock is a buy-and-hold forever in a TFSA
Constellation Software (TSX:CSU), the chain acquirer of vertical market software (VMS) companies that works on the compounding model, is currently in a downfall. A 43% dip in six months and a downward rating by analysts have led to significant selling.
Two reasons act as a strong bear case:
- The fear of artificial intelligence (AI) making VMS companies less valuable looms.
- Constellation founder Mark Leonard has stepped down for health reasons.
The two events seen in isolation make the 43% dip look exaggerated. However, the software industry is undergoing a critical technology transition, which may require adapting to the change. The founder’s exit at such a crucial point makes investors apprehensive.
This stock is monitoring the impact of AI
AI can write basic standard software, but not the ones with heavy customization. Constellation acquires companies where the software is niche, customized to customers’ mission-critical applications, and has a high switching cost.
It is difficult to predict the impact of AI on the VMS landscape, but Constellation’s management is adapting to the change. Discounting the stock by 40% over AI fears is too premature, as they are not affecting Constellation’s future acquisitions or free cash flow (FCF) growth.
Its fundamentals have been running strong with an FCF margin of 15% in the first nine months of 2025.
Constellation’s focus: Organic growth or free cash flow growth
Market bears say that Constellation Software will run dry of acquisition options, and low organic growth will drive down the stock price. Constellation’s model is not based on organic growth but on sticky and assured cash flows. It particularly selects companies that have a limited addressable market, which means there won’t be significant organic growth. However, replacing the software with AI will be expensive and disruptive, as it is the professional service and maintenance that brings in the assured cash flow.
Constellation is relying on reinvesting these cash flows in new acquisitions for growth. The company may not run out of options for VMS acquisitions as the move towards digitization is creating new niches. One way to look at it is a new growth cycle. Even the cloud subscription model was disruptive for licensed software companies, but the cost of switching was too high for some mission-critical applications. And Constellation thrived not because of organic growth but value-driven acquisitions.
Constellation looks at the company’s potential to generate inflation-adjusted future cash flow and acquires the company at a discounted price in cash. Cash is a depreciating asset, but when invested to earn more cash, it becomes appreciative, and that is what is driving the enterprise value of Constellation. Its price-to-FCF of 17.5 times and EV/EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) of 20 times is the lowest since September 2014, even when these fundamentals are growing.
The management change
As for Mark Leonard’s exit, it was inevitable, as he nears age 70. However, his replacement, Mark Miller, is also a veteran, having co-founded Trapeze Group in 1988. Trapeze was the first company Constellation acquired in 1995, and since then Miller has managed Volaris and Lumine Group, holding companies of Constellation. This has diluted the risk of a new management, but the style change could probably be discounted.
Why invest in this Canadian stock through a TFSA
Constellation stock’s compounding model will continue to generate returns in the long term and grow the share price. It can drive the recovery rally and even surpass its previous high of $5,300 in the long term. The TFSA is a perfect instrument for Constellation, as it can make the stock’s 15–20% average annual return tax-free.
