Here’s why Constellation Software is a Buy right now

Technology stocks may be bearing the brunt of this year’s market pullback but there are tech names that savvy investors should be focused on even during uncertain times — change that, especially in uncertain times. That’s according to portfolio manager Zach Curry, who sees Constellation Software (Constellation Software Stock Quote, Charts, News, Analysts, Financials TSX:CSU) as one company set to shine with its proven M&A formula.

“[They’ve got] a great management team and they have shown incredible discipline allocating capital, in businesses that have great models,” said Curry, director at Greenrock Capital Partners, who spoke on BNN Bloomberg on Friday where he nominated Constellation as one of his three Top Picks for the year ahead. “Increased pricing benefits them when they go in and acquire it.”

“They’re one of the few companies that benefits when markets go down,” he said. “Valuations go down, and it allows them to acquire companies at cheaper prices for the longer term.”

Constellation’s share price had an up-and-down, like the rest of the market, rising in June and July and falling back again in August and September. The stock sits with a year-to-date return of about negative 18 per cent, which is par for the course in a 2022 where the S&P/TSX Composite Index is down about 13 per cent, the S&P 500 is down a huge 24 per cent and the Nasdaq Index which houses much of the big US tech companies is down about 32 per cent. Fellow Canadian tech companies like OpenText and CGI Group are down 38 per cent and eight per cent, respectively.

Constellation Software’s modus operandi is to acquire companies operating in niche verticals and plow their free cash flow back into buying more. The company completed a billion dollars worth of acquisitions in its most recently reported quarter, for instance, at a time when Constellation registered $1.618 billion in second quarter revenue, up 30 per cent from a year earlier.

Curry said Constellation’s track record on M&A speaks for itself.

“This management team definitely knows how to do it,” Curry said. “In times of uncertainty, that’s what you look for. You look for management teams that are weathered and experienced and have done this before. They’ve lived through downturns and have the ability to build long-term shareholder returns.”

More from Constellation’s second quarter, the company reported net income attributed to shareholders of $126 million, up 43 per cent year-over-year. Net income on a per share basis was $5.94 per diluted share compared to $4.16 per share a year earlier. Constellation said its topline growth came from acquisitions, as Q2 organic growth registered a negative two per cent.