Companies are designed to “live” forever, outlive their founders, and respectably reward their patient investors through growing shares of profits (dividends) and rising equity values (stock prices). Some will grow organically, but others expand their business empires through acquiring others (looking at you Constellation Software (TSX: CSU)). In my selection of three long-term growth stocks to buy, each has unique market strengths and established moats that make them more capable of producing better returns than competitors.
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Constellation Software retains long-term growth potential
Before its recent 50% drawdown during the past year, mostly triggered by the departure of its CEO and founder Mark Leonard, Constellation Software stock had generated more than 38,350% in total returns for investors since its 2006 initial public offering (IPO) – turning a $10,000 long-term investment into more than $3 million. But the company retains Mark Leonard’s well-institutionalized acquisitions-led growth strategy that values autonomy for the various vertical-market software subsidiaries in its portfolio.
Constellation Software’s new CEO, who is a long-tenured insider with decades of experience under Mark Leonard’s guidance, vowed to continue executing the founder’s strategies. If we allow for a 15% (20% at-most) discount associated with a Mark Leonard premium, then CSU stock’s 50% haircut following the founder’s departure could be overdone.
Perhaps market fears that the business’s vertical software market moats may be threatened by artificial intelligence (AI) agents, like proficient coders within Anthropic’s Claude, may help explain the sustained drop. However, AI agents feed best on proprietary data (which Constellation Software has amassed throughout the past three decades). CSU may potentially defend its market share from encroaching wannabees.
Most noteworthy, CSU stock continues to generate boatloads of free cash flow, a scarce resource that fuels its acquisitions spree. Just recently, its subsidiary Topicus.com reported acquisitions-propelled 23% revenue growth (including 5% organic) and growth in free cash flow for the first quarter.
CSU will report first-quarter earnings on May 12, after markets close. An earnings conference call (a rare occurrence) follows on May 13. Sustained free cash flow growth and Wednesday’s call may trigger a rerating of CSU stock up from a historically low forward P/E of 18.6.
CSU Free Cash Flow Per Share data by YCharts
Waste Connections (WCN) stock
Industrial and residential waste management is a recurring, and usually growing essential need for a functional and sustainable North American economy. Waste Connections (TSX: WCN) stock has thrived in this industry as it created and defended its moats over the past two decades.
The waste management company, which primarily focuses on residential, commercial, municipal, and industrial waste collection, has a secondary market focus on rural areas. Its expansive landfills and exclusive municipal contracts protect its revenue and cash flow streams. Its accretive acquisitors-led growth strategy has extended its market share and boosted earnings and cash flow. WCN stock responded with a 675% total return to shareholders over the past decade.
Looking ahead, Waste Connections remains a growth stock to buy as acquisitions remain a core part of its DNA. Management frequently cites a “robust pipeline” of acquisition targets. Executed well, an accretive acquisitions strategy consolidates market share, creating wider moats. Long-term investors should earn growing dividends on WCN, even as capital gains compound with flawless execution by the Ronald J. Mittelstaedt-led executive leadership team.
During the past five years, WCN grew revenue and increased earnings at above-average rates of 11.8% and 36.9% respectively. Its gross margins and operating margins remain above industry averages. While the stock has shed about 20% of its value over the past 12 months, the business should deliver respectable total shareholder returns over the coming decade while management raises dividends at double-digit growth rates.
Alimentation Couche-Tard (ATD) stock
Alimentation Couche-Tard (TSX: ATD) is the gold standard for the “acquisition and consolidate” model in the TSX’s retail sector. The convenience store operator has grown from a single store in 1980 to a global convenience store empire through hundreds of strategic purchases. Its CEO was named a Distinguished Canadian Retailer by the Retail Council of Canada this year.
The convenience retailer went public in 1999, and ATD stock remains a growth-oriented retailer that has generated more than 200% in total returns over the past decade.
ATD’s massive scale in a fragmented industry and cost-effective “hub-and-spoke” distribution model is difficult for smaller players to replicate. The company is boosting its war chest to expand into new markets and open new locations. Accretive acquisitions may continue to drive long-term growth in ATD stock and enable investors to share in the rich financial spoils.
