jeudi 12 octobre 2017

Constellation Software, great but too expensive

Constellation Software is a great, great stock which I own since 2012. At the time I bought it, the stock was selling for about 90$. Today, it's selling for about 720$. It's my homerun. It's an 8 baggers.

But even if I've had a 8 baggers with that stock, I still haven't found what I'm looking for in this life. It's so sad to realize that an 8 baggers doesn't make you happier.

Maybe if it gets to a 10 baggers, I will finally see life differently. I gotta keep the faith. Otherwise, fuck, what will it take to be happy? I think I will fall off a cliff if that 10 baggers target doesn't have a positive impact on my mind.

Everything you've read about Constellation Software is true: It's a wonderful business that has everything you're looking for: A high ROE, very nice cash flows which are growing steadily, a nice growth in earnings year after year, a low beta, high insider ownership and more... If you find a business with a similar profile, just buy it now. If you have a coffee on one hand and a baby around your arm, just leave them fall on the floor and go in a hurry to your computer to buy this stock while your baby and your boiling coffee are meeting on the floor.

The only problem with Constellation Software is that it's very expensive. The price you have to pay today is 28 times next year's earnings. I know that a lot of great stocks are selling for such a price or more than that. For instance, Mastercard is selling for about the same ratio (PE of 28) and it has a very high ROE like Constellation Software. But it's not because everybody is willing to pay a high price that they're right.


Constellation Software is now a medium/large cap (15B$ market cap) and the PE is high. At such a high multiple, I don't think the stock will double in the near future. I think we could expect about a 10% return every year, but with a lot of volatility because at 28 times earnings, that stock should be volatile to any slight bad news.

I've trimmed a bit my position this week. But I won't sell it entirely. It's a too good stock. But it's probably unwise to have a large part of a portfolio on that expensive stock. I believe there's a limit to a multiple's expansion and CSU is close to that limit.


10 commentaires:

  1. You bought Constellation Software in 2012 for $90.
    Five years from now, how many of the other 20 stocks you own today do you suppose will have better returns for the period 2017-2022 than Constellation Software? The power of Constellation would be more clear if this was a bear market. They would take advantage of much lower stock prices to buy dozens more companies for much lower prices.

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    1. Evolution of the PE ratio of Constellation Software:

      2011: 9,5
      2012: 27,6
      2013: 49,3
      2014: 59,5
      2015: 58,5
      2016: 46,3
      Current: 54,6

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    2. I have the trailing p/e of CSU at 68 and the next year p/e at 28. I predict that five years from now only FIVE of your other 20 stocks will outperform CSU. It's just a guess.

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  2. Premium Brand Holdings is one that reminds me quite a bit today of CSU at 90. And they make sandwiches!

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    1. Right now, it appears that PBH has fundamentally more value, too. Though PBH has alot of market to exploit still. It does not have the same scalability in its sector than CSU has.

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  3. With all due respect Mr. Le Penetrator, IMO, you couldn't be more wrong. Read the following multiple times because when I learned how to adjust non-cash income to cash income, the investing game completely changed for me. I learned this from Greenblatt and to a certain extent Donville. Pay VERY close attention because this is critical. In fact, I'm going to make the case at the end that CSU is cheap. While the stated PE ratio of CSU is an eye watering 56.04 this does NOT reflect the actual cash flows of the business. When CSU acquires a company (always software) they usually acquire a lot of goodwill(intangible). They are able to depreciate this goodwill. So their accounting net income is 'x' and their cash flow is 'x+y'. I maintain spreadsheets for every stock I follow, and I adjust their accounting net income by adding back in non cash items to get their operating cash flow... or what I call cash earnings. As an example, in their last quarter, their net income was $70.7m. However, when we adjust for non-cash items, their operating income (CF) rises to $126.4m. This is a huge difference... for some companies larger than others. If you were to add up the cash earnings for the trailing 4 quarters, you would get $455.9m or $21.51/share. At a share price of $740 their cash PE ratio is 34. Ok, this is still high but it's only high if their ROE sucks. Donville, as an example, likes to see the CashROE/CashPE ratio greater than two. Now, CSU's trailing 12 month non-cash ROE is 39.75 which is excellent. BUT their cash ROE is actually 102.59. So if you take 102.59/34 the ratio is 3. This is outstanding 'value' for a company as profitable as CSU. Hence, they are cheap and I would run to the market and buy your shares back stat. Couple this with the following:

    1) they have just added a lot more deal makers to their group. They are also looking in jurisdictions where they haven't looked before. I actually think they are ramping up their acquisition game. I don't think the market gets this... yet.
    2) from a technical analysis standpoint, today was a KEY day. Whenever a leading stock breaks to new high ground on above average volume (65,000 shares traded today versus avg of 40,000) this is an extremely bullish signal. Another beauty did this today as well... Dollarama. We added to both today.

    Good luck to us. I'm not pretending I have all the answers, but do this to other 'expensive' stocks like CCL.b, DOL, BYD.un and you'll be shocked at the results.

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    1. Thanks for your answer. I don't think CSU is a sell. But I don't think either it's a buy.

      There's some stocks which are easier to understand. Like, for instance, if someone is looking for a high ROE stock, Ross Stores would be easier and safer to hold in my opinion.

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    2. Thanks for your input vicario, very enlightening, as I recall Greenblatt discusses this in his You CAN BE A STOCK MAERKET GENIUS.

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  4. Sure; have you looked at a chart of ROST v CSU?... we own both. Adjusting for non cash items is NOT rocket science but most analysts and PMs have no clue how to do it or why they should do it. That's exciting because therein lies the opportunity.

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    1. Similar to Owner's earning definition by Buffett. I am an accountant (with an audit background) so I know how easy it is to distort soft GAAP earnings and have seen companies doing that without getting too much attention. The most important thing that we should keep in mind is that businesses run on (free) cash flows rather than GAAP earnings. CSU is one of rare companies that are extremely diligent in boosting and focused on (free)cash flows per share (similar to MTY and Lassonde)

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