The longest-running winning streak on the Toronto Stock Exchange – arguably the greatest run in the history of Canadian stocks – is dead.
After 15 consecutive calendar years of positive returns, Constellation Software Inc. CSU-T put up a negative year for the first time in its history.
In 2022, Constellation’s stock succumbed to the slump that engulfed the entire tech sector. The company’s share price dropped by 9.9 per cent.
Tech names were among the market’s main casualties of soaring interest rates, which forced a wholesale repricing of high-valuation stocks.
“When you raise the discount rate as violently as we’ve seen this year, there’s just no escaping that,” said Richard Liley, an analyst at Leith Wheeler Investment Counsel.
Up until this year, Constellation was the escape artist of the TSX. Whatever calamity befell the rest of the market seemed to bounce right off of it. While the stock had its share of dips and corrections, they never lasted long.
The company sailed right through tough years for Canadian stocks, like 2008, during the global financial crisis. It also defied the European debt crisis of 2011, a global commodity correction in 2015 and a rough patch in the global economy in 2018.
Constellation’s stock rose through it all, generating an average annual return of 37 per cent from its IPO in 2006 up until the end of 2021. No other Canadian stock has performed that well for that long.
But it makes sense that 2022 finally put an end to Constellation’s streak, Mr. Liley said. In a year of near-universal losses in asset prices, the selloff was most severe for long-duration stocks and those with relatively high valuations.
Long-duration stocks are those whose peak earnings power is somewhere off in the future. One example is Shopify Inc. SHOP-T, which is more focused on gaining market share than on maximizing its profits right now. Stocks like that are more vulnerable to rising interest rates, to which Shopify shareholders can attest. Its stock declined by 73 per cent in 2022.
While Constellation is a very different company from Shopify, it too can be considered “long-duration” to an extent. That’s because it reinvests almost all of its cash flow. It only pays dividends when it has more cash than it can use.
In fact, that’s one of the things many Constellation shareholders like about the company. The relentless acquisition of mostly small software operations is how Constellation generates such incredible returns over time.
“Most investors like it when companies increase dividends,” Mr. Liley said. But in Constellation’s case, doing so would mean they were running out of acquisition targets.
That definitely did not happen in 2022. The company continued to be an M&A machine. It deployed a record $1.74-billion last year, scooping up 134 companies, according to RBC Dominion Securities estimates. That makes for 785 acquisitions over the years, at an average deal price of $8.5-million.
Constellation’s financial performance in 2022 belied the rotten year for its stock. Its revenues rose by an estimated 22 per cent, and its earnings rose by 14 per cent, according to RBC.
“When we look at the earnings and revenues of the company, that streak has not been broken,” said Jason Del Vicario, a portfolio manager at Hillside Wealth Management in Vancouver.
As long as the company can continue making acquisitions at a brisk pace, its stock will likely remain one of the country’s premier compounders. But don’t expect this to the be start of a comparable streak. Returns of close to 40 per cent a year for more than a decade are not realistic for a $45-billion company, Mr. Del Vicario said.
“But I think there’s a real chance they can continue to grow at double the market.”
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