Constellation Software Inc. (CSU.TO)

A fantastic company. Is down 50% from its peak when it was pricey, but is now cheap enough to buy. Can't tell if this is the bottom. As a value investor, he is definitely watching this. Due to valuation, he doesn't own any software companies.

Stock's been pretty much cut in half on narrative, not on fundamentals. What to do? Do you believe all the nervous Nellies who are selling the stock or do you trust the fundamentals? No question that Mark Leonard stepping down is material to the company. But the team is very strong. 

Now around 20x PE. He expects double-digit topline and bottom line growth for many years to come. Companies aren't going to rip out what works in favour of untested solutions. Markets get things wrong. Trust the fundamentals. He's buying more.

The risk to software applications from AI is why the stock has been underperforming. If you've been paying a lot for subscriptions, you may be able to replace that with a new AI tool and a small team of engineers. That's what has investors concerned.

He's selling Saputo to buy this at this low price (on a downtrend). They buy companies to grow and that won't stop. AI eating the software business is at play now, but CSU Has software for cemeteries, so will cemeteries worry about chat GPT? CSU will still continue to grow. They pay 3x EBITDA. Nothing has changed except the valuation.

Watched with chagrin as it went up and up, but now thankful they didn't get on the train. Mark Leonard built a beast and executed like a well-oiled machine. But his team could never get their heads around the value. Recent deals haven't been big enough to move the needle. AI threatens certain verticals. 

Valuation still steep. And what if it can't regain its growth trajectory?

Let's look at the 5-year chart. You can see the uptrend, but that a bigger downtrend has taken hold. Support's around $2750. Stock's trading right below that, and if it's taken out then next support is something like $2333 (another 10% downside). He'd trim here, more downside coming. If it does bottom and start to reverse up, you can add back -- but not now.

The 10-15 year chart has a bigger longer-term uptrend. It's been broken and is heading lower. It's telling you that something significant has changed. The big advantage of technical analysis is risk mitigation and risk control. To many, the stock drop of 30-40% means that it's 30-40% cheaper. But technical analysis can suggest there's more going on under the surface. In this case, AI has affected a lot of these software companies.

CSU lies at the center of the AI debate concerning software. Their organic growth is slowing a lot. Software developing costs are falling to zero, so a lot more companies are building this software themselves. Maybe CSU continues to buy small companies. There are many question marks about CSU, including what is the moat? Cheap doesn't mean valuable. But he hopes CSU rights the ship.

(Timeframe not quite a year.)  He actually bought more on the stock's drop, which is absolutely overdone. Generates 8% FCF yield if you look at 2027 numbers. As with TOI, vertical software integration companies might actually be beneficiaries with what is happening with AI. 

Last year was its second-highest year of capital deployment. Private equity is not as competitive right now, so CSU can do acquisitions much faster.

Acquisitions are immediately accretive to the bottom line. There comes a point where you've rolled up all you can roll up. You can't keep rolling at the same rate, just not as many opportunities to go around. May be a while before it recovers.

Follows closely, given its long-term track record. With pullback, now ranks 10/10 on fundamentals. Near-term story is on pause. Organic growth slowed this past quarter, the slowest pace in 2 years. Big overhang is the Altera acquisition, struggling to regain momentum, and reminding the market that not every deal delivers immediately. M&A remains the engine of the model, but deal activity is running about 15% behind last year's.

Analysts still see almost 45% upside from here. On her watchlist. For her to jump in, she'd need strong conviction on a turnaround or at least that it's not still on the downward technical trend.

Was spun-out from Constellation Software, which he owns. He sold TOI to buy more Constellation, which owns large stakes of TOI anyway. He wanted to keep things simple. His kids own TOI, which trades at $120 vs. $3,300 for Constellation, so TOI is more accessible to investors. Also, it's easier to grow the smaller TOI than Constellation through acquisitions. Both are great businesses to own. Shares of both are down a lot now on fears that AI will replace software. (He doesn't know either way.)

The CEO just retired for health reasons. CSU can survive this CEO change. They have a history of buying companies then letting them operate. They deploy capital at high rates of return as they scale, which is hard to do. A risk is can they continue to do this? He thinks so.

Great business over time. High-quality cashflow stream. Suffered from "key man" risk, Mark Leonard was the visionary behind its capital model. Question is whether new CEO can maintain the same rate of return?

His firm's strategy needs 3 things. 1) Like the sector. Software as a whole has been a weaker relative performer within tech and vis-a-vis the rest of the market.  2) Strong fundamental characteristics, "good and getting better".  3) Technicals intact. This stock is a bit broken, trading below 200-day MA. 

Lots of other things to do right now in other parts of the market. Wait and see on this one. Remember, he's not a value investor. He's willing to give up a bit off the bottom to actually see things improving before putting $$ to work.

Hold if you own, consider picking it up if you don't. CEO stepping aside surprised markets. Serial acquirer of vertically integrated software. Thousands upon thousands of small companies worldwide to potentially be scooped up. Deep pipeline of potential deals.

Concerns of software being disrupted by AI. Thinks it's the best-performing company on the TSX since it went public almost 20 years ago.

Phenomenal compounder. Sentiment has gone against it over the short term. Over the long term that will re-rate, and you'll get your opportunity for earnings growth and multiple expansion. Some concern has focused on change in CEO, yet this is a very decentralized business. Timing was unfortunate.

Real uncertainty is on the AI side. Yet reality is that these are companies that are going to be using that capability to make their products better. Quite constructive on it at this price, a great buy. Yield is 0.16%.