Don’t worry about Constellation Software, says James Telfser

The stock has gone through a serious pullback in recent weeks, enough to potentially cause concern among investors of this seemingly gold-plated Canadian tech name.

No need to worry, says James Telfser of Aventine Asset Management, who claims that dips like this are a good time to buy.

A bona fide success story in the realm of growth-by-acquisition companies, Toronto-headquartered Constellation Software has made its name in buying up small, vertical market software companies serving niche segments and industries in addition to the occasional larger purchase. The stock has been a steady climber for years, blowing past the $1000 per share mark in 2018 and rising to $1440 per share by the end of November this year — an amazing trip for a stock that could be bought for less than $40 a decade ago.

But CSU has been in a funk since that late November $1440 high, now having lost almost 11 per cent of its value and treading below the $1300 mark. And that’s been without any real event to speak of.

Is it a result of insider selling or the market’s decision that the stock had run too far? Telfser said the dip is likely just a natural reaction to the big gains that CSU has posted over recent months.

“It had a bit of a pullback but this happens from time to time. You’ll get these high quality names that will make a big run and then they’ll pull back,” said Telfser, managing partner and portfolio manager at Aventine, speaking to BNN Bloomberg on Monday.

“If you’d bought Constellation every time it pulled back three per cent-plus, you’d be very wealthy investor,” he says. “I don’t think it’s anything to worry about. The business is so diverse with so many different products and different business lines on the software side that there’s not one thing that would knock it off one way or the other.”

“You’ll get these periods where growth versus value will come into play but that’s all that this is,” Telfser said.

Constellation last reported its earnings on October 29, where it posted revenue of $870 million, a 15-per-cent uptick from the year before, and net income of $82 million, up 24 per cent year-over-year, or $3.85 per diluted share.

Over its third quarter ended September 30, Constellation made acquisitions totalling $278 million, which includes acquired cash, while the company’s free cash flow available to shareholders grew by 20 per cent year-over-year to $134 million. At the same time, the company declared a $1.00-per-share dividend.

Telfser says CSU’s pullback creates a potential opportunity for investors.

“We don’t own it, but if it does two or three three-per-cent down days in a row we’ll own this stock for the rest of our lives, probably, because it’s a great business and they’ve been doing great things in reinvesting their cash flow,” Telfser said.