Is Constellation Software a “no-brainer” right now?

First Avenue Investment Counsel chief investment officer Brian Madden says Constellation Software (Constellation Software Stock Quote, Chart, News, Analysts, Financials TSX:CSU) remains attractive after a sharp pullback, arguing the market has overreacted to fears that AI will disrupt software companies.

Speaking on BNN Bloomberg’s Market Call on June 5, Madden said First Avenue is “taking the under” on what he called the AI-driven “witch hunt” against software stocks.

“This stock is starting to perk up, but it’s really been drawn down sharply in the last 12 to 15 months,” Madden said.

Madden said Constellation, Canada’s second-largest technology company behind Shopify, is not a household name but has built one of the country’s strongest long-term track records by acquiring vertical market software businesses.

“We sometimes liken it to a narrowly focused private equity fund, specializing in acquiring vertical market software companies,” he said.

Madden said vertical market software is typically used in specific industries, such as veterinary clinics, coffee shops or golf courses, making the product mission-critical and revenue sticky, even if organic growth is slow.

He said Constellation has been exceptional at deploying capital into a fragmented market by acquiring small and mid-sized software companies. While that activity slowed over the past two years, Madden said it re-accelerated in the latest quarter.

The fund manager also pointed to Constellation’s new capital allocation pathway, which it calls permanently engaged minority shareholders, allowing the company to take long-term strategic stakes in publicly traded software companies.

So is Constellation Software a”no-brainer” buy right now?

“Any time you get a dip in a company that’s generated a 21,500% total return since the IPO in 2006, you buy it,” Madden said.

Disclosure: Cantech Letter’s Nick Waddell owns Constellation Software

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