Buy Constellation Software, this investor says

There’s one upside to the prolonged pullback in tech: some stocks which rarely go on sale are actually doing so. And that, says portfolio manager Kim Bolton, is currently the case with Canadian software consolidator Constellation Software (Constellation Software Stock Quotes, Charts, Financials, News, Analysts TSX:CSU).

“One of my good ideas is Constellation Software. We’ve had the great fortune of getting into Constellation when there have been a few of these swoons so far this year, and you rarely get a chance to get into a great company like this one,” said Bolton, president of Black Swan Dexteritas, who spoke on BNN Bloomberg on Tuesday.

Constellation continues to trade around the $2,200 mark where it has mostly stayed since last September, which is an achievement in itself compared to most of the battered tech sector. Mid-November of this past year, the market lost its flavour for tech and high-growth, high-beta stocks amid an uncertain economic climate. And aside from a few minor rallies the result has been significant lost ground for many tech names. The tech-heavy NASDAQ Index where many of the big American technology companies live is down about 16 per cent from its November high, a notable divergence from the broader S&P 500 Index which is down about five per cent over that period.

In Canadian stocks, e-commerce giant Shopify is the most glaring example of the trend. SHOP has lost an incredible 68 per cent — over two-thirds of its value — since mid-November, and that’s on very little news from the company other than an expected slow-down in its (still-positive) growth rate due to the return of some shoppers to bricks and mortar stores. Overall, the TSX Information Tech Capped Index is down almost 35 per cent since November, and of the constituents of the Index over two-thirds are in the red for the past 52 weeks, with many of them far into the negative double digits.

Yet, one of the few brights lights is Constellation, which has a 21 per cent return over the past year.

“Constellation Software is a fantastic poster child for the Canadian technology arena,” says Bolton. “What they do is acquire software companies but they do it in a vertical strategy. They buy companies that are geared towards specific industries and businesses, be it maybe in agriculture or manufacturing or healthcare, and they use the scale of that and go out and touch those verticals in those various industries.”

“And the team over at Constellation have done a fabulous job. They have a return on invested capital of 32 per cent over the last ten years,” he said.

Bolton estimates there’s about an 18 per cent upside to CSU from current levels.

“It’s trading around $2262 and we have a twelve-month price target of $2665, so it’s got a nice runway going forward,” he said. “This should be in people’s portfolios, and even in these swoons that we’ve had [the stock] hasn’t come down that much, but it’s a great opportunity.”

Ahead of Constellation’s first quarter 2022 financial results which are due on May 4, the company last reported in February where it finished off the 2021 fiscal year with Q4 revenue up 27 per cent (with five per cent organic growth) to $1.383 billion and net income down 17 per cent to $124 million or $5.86 per diluted share.

CSU said its acquisitions over the fourth quarter totalled $487 million, while for the year completed acquisitions totalled $1.571 billion. The company’s cash flows from operations (CFO) for the fourth quarter were down four per cent year-over-year to $341 million, while for the 2021 year CFO was up ten per cent to $1.300 billion. Constellation’s full-year 2021 revenue was up 29 per cent to $5.106 billion but net income was down 29 per cent to $310 million.