Constellation Stock in an FHSA account: A Smart Way to Save for a Down Payment on a Home
Written by Vishesh Raisinghani at The Motley Fool Canada
Canadians are quickly adopting the First Home Savings Account (FHSA) to save up for their first property purchase. The account could be considered a hybrid of the Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP); the FHSA is specifically designed for young people looking to buy their first home in Canada.
Unfortunately, the FHSA program only solves part of the issue of homeownership. Canadian taxpayers can deploy a maximum of $8,000 per year into the account and can deploy a maximum of $40,000 over their lifetime. That’s simply not enough to cover the down payment on most homes. As of April 2023, the average Canadian home sold for roughly $686,371. That means a 10% down payment would be at least $68,371.
To close this gap between home prices and savings, Canadians need to deploy their FHSA funds in a stock that is growing faster than average and also safer than the average investment opportunity. I believe enterprise software giant Constellation Software (TSX:CSU) is the perfect candidate for this.
What makes Constellation stand out as an ideal candidate for your FHSA is its growth rate. The company grows via acquisitions, and its pace of acquisitions has intensified in recent months while private software company valuations have dropped. This buying spree should be reflected in the balance sheet in the years ahead.
Looking back, Constellation stock is up a jaw-dropping amount since its initial public offering. The stock started trading at $17 in 2006 and is now worth $2,740. That’s a compound annual growth rate of 36.8% over 16 years.
At that pace, every dollar invested in CSU would turn into $4.8 within five years. Put simply, this is the level of growth you may need to make your FHSA worthy of a home purchase.
Growth isn’t everything. When you’re saving to purchase a home and secure your family’s future you want to avoid losing money. Several high-flying growth stocks have plummeted in recent years, which means aggressive growth strategies need to have a margin of safety.
Fortunately, Constellation is a lot more secure than other tech companies with similar growth rates. This isn’t a software developer, it’s a holding company with a vast portfolio of niche software firms. Many of these acquisitions have been picked for their mission-critical services in niche sectors of the economy. Think agriculture, inventory management, and accounting.
Meanwhile, roughly half of Constellation’s software is generated from government agencies. That means its revenue is more sticky and a lot less volatile.
Constellation stock has never had a drawdown greater than 26%. That’s excellent performance for a high-growth tech stock and is another reason why CSU deserves a spot on your FHSA.
Constellation stock is trading at an all-time high now. But that doesn’t mean it’s overvalued. The stock is trading at just 6.2 times sales and 48.5 times free cash flow per share. If the company can keep growing at double-digit percentages, this valuation is completely justified.
Put simply, there’s limited downside risk for Constellation — another reason why you should consider it for your FHSA.
The post Constellation Stock in an FHSA account: A Smart Way to Save for a Down Payment on a Home appeared first on The Motley Fool Canada.
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Fool contributor Vishesh Raisinghani has a position in Constellation Software.