Claim Membership Credit
Congratulations to early investors in Constellation Software (TSX:CSU), one of the TSX’s most consistent growth stocks. A $1,000 investment in Constellation Software stock more than tripled in value over the past five years and gifted invested with stakes in two spin-offs with promised long-term growth potential.
Constellation Software is an $80.4 billion technology company that grows through acquiring smaller software companies that provide mission-critical solutions to both public and private clients. Its offerings aren’t easily switchable and replaceable, giving the TSX tech stock tangible moats and sticky revenue profiles. Founded by an experienced venture capitalist, Mark Leonard, Constellation Software stock has been a marvel to growth-oriented investors since going public in 2006.
So, if you’d bought CSU stock five years ago, how much could your investment have returned to this day?
Impressive returns on Constellation Software stock
A $1,000 investment in Constellation Software stock at the beginning of February 2019 could have bought you a single share in the company. That share is worth nearly $3,800 at the time of writing — close to a 280% capital gain in a little over five years.
Constellation stock has steadily and consistently risen over time, with lower volatility and smaller drawdowns compared to other Canadian tech peers. The worst drop in the stock during the past five years was a 24% drawdown seen during the COVID-19 pandemic, followed by two closely matching drops in 2022 when investors fretted over record rises in interest rates.
What could explain CSU stock’s low volatility?
Constellation Software is a blue-chip tech stock with consistent revenue, earnings and cash flow performance that earns it ever growing love from its investor base. Additionally, the low volatility in CSU stock could partly be due to the company’s high absolute stock price, which had surpassed the $1,000-per-share mark by March 2019.
High share prices may help reduce volatility. It can be said that individual investors, who usually have small capital budgets, generally avoid companies with high absolute share prices. A low presence of retail traders in a stock leaves larger investors as its typical traders — and the usually professional investor group generally holds positions long term and trade infrequently, dampening an asset’s price volatility.
Perhaps that’s why Constellation Software hasn’t split its stock, despite growing market speculation for management to do so. Companies usually split their common shares to make prices more “affordable” to retail investors and improve their liquidity. However, individual investors sometimes trade based on emotions, including fear and greed, introducing high volatility in a stock.
Interestingly, though, the advent of fractional share trading cancels the argument. Retail investors can buy fractions of a stock today if their online brokerage accounts allow.
Constellation Software rewarded investors with free stocks
If you invested $1,000 in Constellation Software stock five years ago, your single share could have earned you “free” shares in the company’s two listed spin-outs — a new layer of additional returns to CSU stock investors.
Firstly, a successful spin-off of Topicus.com in January 2021 earned investors 1.86 Topicus.com shares for each Constellation Software share held. Those shares would be worth more than $232 at the time of writing.
Secondly, another successful spin-out of Lumine Group in February 2023 earned investors three (3) Lumine Group shares for each Constellation Software share held. Those shares would be worth about $112.50 today.
In total, spinoffs added nearly $345 (an additional 34.5% return) on a $1,000 investment in Constellation Software stock made five years ago.
Should you buy?
Constellation Software retains most of the strong fundamental qualities and moats that made the business a successful Canadian tech story. I would still add the growth stock to a long-term portfolio.
That said, the company modified its acquisition strategy to include larger targets in 2021. Larger acquisitions may produce lower internal rates of returns on investment. Coupled with increasing leverage, CSU stock could produce lower annual returns than the 30.4% it averaged each year over the past five years.
Regardless, Bay Street analysts project 21.8% and 20% growth rates in revenue and earnings per share, respectively, over the next two years. Sustained growth may continue to justify higher equity prices over the next two years.
