Constellation Software Just Moved: 2 TSX Tech Stocks to Watch Now

Constellation’s surge is putting its “buy-and-compound” playbook back in the spotlight — and two younger spinouts could be next.

Amy Legate-Wolfe

Author Bio

Amy became interested in investing in 2018 after having her first daughter. After receiving a masters degree in journalism from Western University, she became frustrated that the finance industry remained a confusing place for Canadians like her: new parents, millennials, and other young people who needed to understand their finances. Now, Amy focuses on tech companies and renewable energy for growth opportunities, coupling that with long-term investing strategies and equities. She also provides investors with a daily newsletter, Canada Stock Digest, for daily market updates. Before joining Motley Fool Canada, she wrote for major news organizations including HuffPost, CTVNews.ca, and CBC. When she’s not researching investing strategies, Amy’s time is pretty much monopolized by her two wild daughters, but in what little spare time she has she loves to do yoga, go on walks with her dog, and travel with her husband.

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“October: This is one of the particularly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” – Mark Twain

Published May 28, 9:00 pm EDT

| More on: CSULMNTOI

Key Points

Constellation’s strong quarter reminded investors that niche-software acquirers can compound for years.
Lumine is growing revenue, but profits and organic growth need to improve to prove the model works.
Topicus is posting strong sales growth, yet earnings are pressured, so investors need margin leverage next.

Constellation Software (TSX:CSU) just reminded investors why great software stocks are still worth a watch. The Canadian tech giant reported first-quarter revenue of US$3.2 billion, up 20% from last year. Net income jumped to US$367 million from US$136 million. And now, shares are up 9% in the last month alone after a drop year to date.

That kind of move grabs attention as Constellation stock built its name by buying niche software businesses and letting patient compounding do the work. Now investors want to know where else that model could shine. So, where else should investors keep an eye on?

An analyst uses a computer and dashboard for data business analysis and Data Management System with KPI and metrics connected to the database for technology finance, operations, sales, marketing, and artificial intelligence. — Source: Getty Images

LMN

Lumine Group (TSXV:LMN) deserves a close look now as it comes straight from that same family tree. The company focuses on vertical-market software for the communications and media sectors. That sounds niche, but that’s the point. Lumine buys specialized businesses, holds them for the long term, and tries to improve cash flow over time.

The latest results looked mixed, but not weak. First-quarter revenue rose 17% to US$208.3 million. However, operating income slipped 3% to US$57.9 million, while net income fell 9% to US$19 million. Investors should not brush that off. A true Constellation-style stock still needs discipline, not just deals.

Still, Lumine has a timely catalyst. Communications companies continue to spend on software that helps manage networks, customers, billing, and media systems. Those are essential tools. If Lumine can improve organic growth while continuing to buy well, the stock could draw more attention. The risk sits in that same sentence. Organic growth came in negative after currency adjustments, so investors need proof that acquired growth can translate into stronger earnings.

TOI

Topicus.com (TSXV:TOI) may offer the cleaner growth story. The company focuses mostly on European vertical-market software, with a strong base in public-sector, health, education, and finance-related software. It also shares DNA with Constellation stock, which gives investors a familiar playbook: buy good niche software companies, keep them independent, and compound over years.

Topicus reported first-quarter revenue of €435.7 million, up from €355.6 million last year. That’s strong top-line growth. Yet net income fell to €34.2 million from €44.8 million, while diluted earnings per share (EPS) dropped to €0.41 from €0.54. So the excitement comes with a catch. Topicus grew, but costs and acquisition spending weighed on earnings.

That doesn’t ruin the case, but just makes the next few quarters important. Investors may forgive softer profit when revenue growth remains strong and acquisitions build long-term scale, but will want margin improvement eventually. Topicus could pop if it shows stronger earnings leverage, especially with Constellation stock back in the spotlight. The risk is valuation. Software stocks can fall hard when investors pay for perfection and receive “pretty good.”

Bottom line

So, if Constellation’s latest results made investors look again at Canadian compounders, Lumine and Topicus should sit near the top of that watchlist. They both carry acquisition-driven growth stories with real risks. Yet together during this comeback for Constellation stock, these three could power forward any portfolio on the TSX today.