Giving Away One of Our Best Picks for Free
The kind of stock we normally charge for. Not today.
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I just found the perfect example of what makes a true compounder.
You know the type - a business that:
Generates high returns on invested capital
Operates with a formidable moat
Has a management team that thinks in decades, not quarters
Boasts a long runway for reinvestment
Dominates fragmented niche markets
Today's stock checks every single box.
And I am going to give it away for free.
As you may have seen, things are changing around here:
Starting July 7th, subscribers will see 2-4 potential multibaggers per month instead of one.
More case studies.
More insights.
The LVP Multibagger Index tracking every pick in real-time.
This analysis is a preview of the quality work coming down the pipeline. The kind of deep dive into exceptional businesses that subscribers will see multiple times each month.
Consider it a sample of what's ahead.
Also, the 25% discount on annual subscriptions runs until Monday. After that, it's gone.
You can get that here if you want:
But first, let's talk about this business...
Topicus (TOI) - Constellation Software's Mini-Me
It's hiding in plain sight.
A software roll-up company spun off from one of the greatest compounding machines in stock market history.
I'm talking about Topicus.
Capital allocation excellence wrapped in a boring package.
The perfect hunting ground for multi-baggers.
Topicus is a spin-off from Constellation Software, one of the greatest compounders of the past two decades.
If you've followed Constellation's incredible journey from obscurity to a $60 billion market cap, you already understand the playbook.
And Topicus is running that exact same playbook in Europe's fragmented software markets.
The Business
Topicus acquires vertical market software (VMS) companies across Europe. These are specialized software businesses serving niche markets like education, healthcare, government, and financial services.
The company has grown from approximately €500 million in revenue in 2020 to over €1.29 billion today. That's not hypergrowth, but it's the kind of steady compounding that creates generational wealth.
What makes Topicus special is the model.
They buy small, mission-critical software businesses, often for less than €20 million each. These aren't the glamorous acquisitions that make headlines. They're the boring, essential software companies that their customers can't function without.
Once acquired, these businesses continue to operate independently within Topicus's decentralized structure.
This preserves their entrepreneurial culture while giving them access to Topicus's capital and expertise.
It's a beautiful model that scales incredibly well.
The Moat
The strength of Topicus's business lies in the switching costs its software creates.
Think about it from a customer's perspective.
If you're a European hospital using Topicus software to manage patient records, billing, and operations, switching providers would be a nightmare. The cost, time, and potential disruption make it prohibitive.
This creates a stable, recurring revenue base that Topicus can count on year after year. About €900 million of its €1.29 billion in revenue comes from maintenance and other recurring sources.
These high switching costs lead to customer retention rates that would make most businesses drool.
And these customers aren't just staying—they're paying year after year after year.
The Runway
Europe's software market is uniquely fragmented due to diverse regulatory frameworks, language differences, and localized customer needs. This creates a perfect hunting ground for Topicus.
The European vertical market software sector is valued at €36.15 billion in 2023 and projected to grow to between €63 billion and €90 billion by 2034.
That's a CAGR of 5.6% to 11.7%.
But the real opportunity isn't market growth. It's consolidation.
There are thousands of small, niche software businesses across Europe that fit Topicus's acquisition criteria.
The hunting ground is vast, and Topicus has barely scratched the surface.
The Management
Topicus is led by Robin van Poelje, the founder of Total Specific Solutions (TSS), which was sold to Constellation Software in 2013.
This isn't some hired-gun CEO. This is a founder with serious skin in the game.
The Joday Group, controlled by van Poelje, holds a 30.3% ownership interest in Topicus.
Meanwhile, Daan Dijkhuizen (CEO of Topicus Operating Group) has over €20 million personally invested, approximately 0.25% of the company.
Let that sink in.
When management owns this much of the business, they don't think quarter-to-quarter.
They think decade-to-decade.
And sitting on the board is Mark Leonard, the founder of Constellation Software, one of the greatest capital allocators of our time.
Constellation still holds 100% of Topicus's super voting shares, ensuring their continued guidance.
This is exactly the kind of management team you want running your compounding machine.
The Structure
I know, corporate structures are boring. But in this case, it matters.
Topicus has a complex structure that reflects its evolution as a spin-off from Constellation Software.
Constellation maintains control through 100% of the super voting shares, while the Joday Group (led by van Poelje) holds 30.3% and IJssel (controlled by Dijkhuizen) holds 9%.
Topicus itself owns a 60.7% stake in Topicus.com Coöperatief U.A., a Dutch cooperative entity that fully owns the Total Specific Solutions Operating Group.
But here's what matters: The structure ensures that the interests of Constellation, management, and shareholders remain aligned.
Everyone is incentivized to maximize long-term value creation.
The Valuation
Here's where things get interesting.
Topicus isn't cheap by traditional metrics. It trades at a forward P/E of approximately 45.2x.
But that's misleading. As a serial acquirer, Topicus's earnings are reduced by non-cash amortization of goodwill and intangibles (€135.5 million in 2024 alone).
Working backwards from the current stock price (around 160 CAD), Topicus would need to grow its unlevered free cash flow at roughly 20% annually for the next decade to deliver a 10% annualized return.
Is that achievable?
Constellation Software has done it. And Topicus is starting from a smaller base with a massive runway ahead.
If Topicus achieves "only" 15% annual growth the intrinsic value works out to about 115 CAD, suggesting you'd earn less than 10% annually from the current price.
So expectations are currently high.
But remember: This business reinvested 100% of its free cash flow this year. These expectations are not crazy. There is just not much margin of safety at they current prices.
The Risks
Nothing is perfect, and Topicus comes with risks:
Integration challenges with its many acquisitions
The complex European regulatory environment
Potential for overpaying for acquisitions
Competition from larger software providers
Economic slowdowns in Europe
But these risks are manageable, especially with owner-operators at the helm who have every incentive to navigate them successfully.
The Bottom Line
Topicus checks all the boxes for a potential multi-bagger:
High returns on invested capital
Owner-operators with significant skin in the game
Strong moat through high switching costs
Massive runway for growth in a fragmented market
Proven capital allocation strategy
At current prices (around 160 CAD), you're probably looking at a high-single-digit annual return if they hit 15% growth. But if they can maintain 20% growth—like Constellation did—you're looking at 10%+ returns.
Not cheap, but reasonable for a quality compounder.
Personally, I'd prefer a bit more margin of safety. Below 130 CAD, this becomes a much more compelling opportunity.
Remember, the greatest multi-baggers don't look cheap in the early stages.
They just look like high-quality businesses with long runways.
Time does the real work.
Thanks for reading,
Nico
Disclaimer: The Content does not constitute investment advice, financial advice, trading advice, or any other sort of advice. Nothing in this newsletter should be construed as a personal recommendation or advice to buy, sell, or hold any investment or security. All Content is provided for general informational purposes only and should not be relied upon for making investment decisions. You should not make any investment decision based solely on the Content without first consulting with qualified financial advisors, conducting your own research, and considering your individual financial circumstances, investment objectives, and risk tolerance. To read our full disclaimer, click here.