Investment Strategy

Companies with high return on capital outperform.

Companies with competitive advantages outperform.

Companies with durable growth outperform.

We invest at the intersection.

We call these companies compounders.

These companies generate high returns on invested capital and have access to attractive opportunities to reinvest earnings. Their business is predictable, stable, and able to grow for many years. We invest in these high quality companies directly and intend to hold for the long term.

How we do it

We look for high-quality companies that have demonstrated strong performance and have a compelling narrative for the future. We gauge the quality of a company through two primary lenses: fundamental and qualitative.

Fundamental

Fundamental analysis covers the company’s metrics – primarily their operations and balance sheet. The primary data points we consider are:

• Revenue – consistency over time and future expectations
• Margins – gross and net profit margins, considering also the stability and trend
• Earnings – adjusted and GAAP earnings, at the company level and per share
• Free cash flow – operating and free cash flow, at the company level and per share
• Net debt/cash – debt can be healthy or it can be destructive; viewed relative to earnings and market capitalization
• Shares outstanding – increasing (raising capital) or decreasing (share buy-backs)
• Return on invested capital – a measure of a company’s earnings relative to the resources required to operate (i.e. capital, including debt and equity)
• Free cash flow (FCF) return on invested capital – a measure of a company’s FCF relative to the resources required to operate (i.e. capital, including debt and equity)

Qualitative

Qualitative assessment provides a unique insight into the future prospects of the company. Key considerations include:

• Moat – unique and durable competitive advantages
• Management – executive team’s track record and past experiences
• Market – size of their total addressable market, favorable industry trends
• Culture – mission, vision, values, employee perception
• Margin of safety – understanding risks and containment of any impact