Constellation Software Inc. (CSU.TO)

A great growth story over 20 years, but their long-serving CEO retired last year and shares declined. This is a show-me story. Also, it has been hit by AI fears. Trades at 10x EV to EBITDA, half its historic values. Hang on if you own it. Eventually, we will realize we still need software. There are worse places than CSU to put your money.

All blue-chip stocks have a gut check at some point in their history. Very cheap. Depends on whether roll-up strategy can continue in the AI world. CEO shuffles have caused panic.

On the metrics, his team thinks about 90% of software carnage is done. Levels now are good for at least a trade.

Pays a 0.23% dividend. It's a good company, but a bad stock. Is well-managed. For many years were doing a good job of vertical integrations which saw high valuations, just when the AI boom took off. Canada has few Canadian tech names, and now tech is selling off. They grow by M&A, which can be risky. Now might be an attractive entry point, but not for her.

All of the Top Picks today are being tarred with the same software brush, with very little differentiation of what they do and how they do it. For this name, it's all about its size.

It's a large-cap, doing over 1k acquisitions since its IPO roughly 20 years ago. Its small, niche clients have very little incentive to switch to a competing product, and there's no economic rationale to do so. Massive end-product diversity and massive client diversity. AI can actually be used to customize its products. Compelling valuation. Yield is 0.23%.

CSU appears to be nearing its low point. They believe investor sentiment has reached rock bottom, especially given the absence of any negative fundamental or company-specific developments (in fact, its acquisitions were favorable). However, one shouldn't read too much into a single trading session. CSU moved independently on Wednesday with an 8.5% surge, essentially capturing some of today's technology sector gains ahead of time. That said, the stock doesn't always follow sector trends due to nervous long-term holders sitting on substantial unrealized gains. Unlock Premium - Try 5i Free

It'll take 2 or 3 earnings to calm the jitters out there. Used to own; got out of the way when it went through $3500. Impossible to try to catch a falling knife like this. Getting brushed with the whole software vs. AI scare.

If you've held on this long, hold on. Put a stop under the most recent low, which is around $2150-2200. If it breaks through there, lighten up. It's actually bounced a bit. This might be the level it consolidates around.

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.