Constellation Software Inc. (CSU.TO)

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%.

Its strategy of making accretive buys can still continue. Buy when it's down. Investors are taking a dim view of software while AI has had the sizzle. Analysts are modelling 18% growth, trading at 24x PE for 2027 -- kind of pricey, and similar to NFLX. NVDA is actually a cheaper stock on price to book.

If you put a gun to his head and said choose Buy or Sell right now, he'd say to buy. But other places have slightly better risk/reward and more upside. He wouldn't sell down here at these levels. 

Canada always has a tech darling that it flocks to for years -- stock goes up, and then it comes down. You can see this on the 3-year chart. Did a really good job, but valuations that high don't last forever. As it gets bigger, needs to make bigger acquisitions. These growth-by-acquisition stories don't usually end well. No dividend.

She wants to see organic growth and a reasonable valuation.

Doesn't this remind you of Berkshire Hathaway, when the patriarch steps aside? He lightened up when it went through $3500, and would love to get back in. In situations like this, he finds that you need to go through a couple of quarters and just see how it's performing. Fantastic company. 

Has slid since the summer. Some investors are worried about AI threatening their business, and the CEO surprisingly resigned for health reasons. It's too early to answer the AI question. They have a lot of resources and are already using AI. Is one of the best Canadian companies and compounds capital well. At 19x earnings is a super entry point.

Is hurt by the CEO retiring and the fears of AI impacting their business. The won't change their hurdle rate when they buy future companies. Basically, CSU buys software businesses and won't change their approach. Will continue to execute well, even with a new CEO.

Wonderful business. Doesn't own because it's highly priced, even at this level. It would have to go down a bit more for him to buy. Any hiccup in the business and it'll go down more. But you never know what investors are going to do tomorrow.

Has done a great job of picking up other software companies, not worried about that part. A theme that will no doubt keep coming up in today's show is that it's all about price in this market today.

The chart is still struggling. He sold this last January as it lost relative strength. All tech software stocks have been struggling for several months and continue to. Next support is at $3,000, then $2,750. This is still bottoming.

Well managed, now has new CEO. Grows mainly through M&A, not organically, and it's been very successful. She prefers to see a balance of the two. Will AI affect demand for some of its products? A much larger company than 10 years ago, so growth through M&A requires much larger transactions.

There are other software companies, such as MSFT, with more of a recurring revenue stream and visible growth without having to do M&A.

Has performed well for so long. The CEO has stepped down for health reasons, so they can't buy companies at the same rate as before.  But it's a decentralized business where acquisitions take place in the business units themselves. Shares are attractive.

CEO leaves very big shoes to fill. Its vertical software model is at risk in this AI environment. It is possible to replicate what they've done, and he'd never have said this 5 years ago. Customers may be fully locked in, but there may be a loss of pricing power. 

He'll be trimming on strength. Be careful about investing in software as a whole.