The Goal of This Substack: Identify Wonderful Public Companies
The purpose of this substack is to research publicly traded companies and share my findings.
I conduct this research for my own personal portfolio. In addition to company write-up’s, this substack also tracks my personal portfolio.
My goal is to find wonderful companies and purchase them at wonderful prices. Ultimately, I would like to own 12-15 of these situations.
“Wonderful companies at wonderful prices” is an extraordinarily tall order, but I don’t want to settle for anything less than that. I’m running an extremely concentrated portfolio, which means I have some very strict criteria. There are thousands of stocks globally, and I should be able to find 12-15 stocks meeting my criteria to fill up a portfolio.
I will pass on many companies because they don’t meet 100% of my criteria. Many will turn out to be great investments, anyway. I’m alright with that. I don’t need to be right about everything.
The sort of companies that I write up will meet most of my criteria. They have to at least pass a certain hurdle to get my attention to look deeply into it.
For every write-up, I will run through my checklist of criteria.
Write-up’s will analyze companies on all of the below points.
There are a large number of companies (in fact, most of them) which will be ‘wonderful’ but do not meet my valuation criteria. I will put these companies to the side but monitor them. If they ever reach a compelling valuation, then I will buy.
Can the stock deliver a 10% CAGR for the next decade?
I am looking for situations where shareholder yield (dividends + buybacks) combined with modest growth in the business and some modest multiple appreciation could deliver a 10% CAGR over a 10 year holding period.
I would like the company to generate shareholder yield with free cash flow that the business creates on its own. I’m not interested in companies that are issuing debt to buy back shares and issue dividends, which is a troubling sign.
I am looking for businesses that are worthy of being held, not just traded for a pop in the next year.
If I can’t meet this 10% hurdle, then I might as well own my asset allocation strategy, which I wrote about on Medium here.
Owning individual securities is highly risky. Even the excellent situations that I’m looking for will have higher risks than a simple asset allocation strategy. If I can’t meet a 10% return hurdle as compensation for this risk, then I might as well own my asset allocation.
Has the business delivered consistent results over a long period of time?
I am not looking for businesses where they endure a relentless boom-bust cycle. I want something with a proven track record of performance. I want a business that has survived recessions and thrived.
If the stock never delivered a return for anyone else, why would it ever deliver a return for me?
I don’t want to rely on capturing a business at the nadir of a cycle and selling at a top. I will try to capture a business near a nadir - but I want the type of business where even if I get the timing wrong, I can still earn a decent return.
Does the return on equity consistently exceed 10% without the use of heavy leverage?
This ties into my 10% return hurdle. Over the very long run (20+ years), the CAGR on most stocks is closely tied to the business’ return on equity over that time period.
I prefer a lot more than a 10% return on equity, but that’s the bare minimum to meet my return hurdle.
I also don’t want companies that achieve a high ROE with the use of heavy leverage. Leverage works until it doesn’t. Even a rock-solid stable business can encounter unexpected trouble.
Is management sketchy?
I don’t need the management team to be superstars. However, I do not want to be in business with someone who is dishonest or unethical. I don’t want to be in business with someone who can potentially be a fraud or engage in unethical practices that can sink a business. This means avoiding grifters, promoters, or the type of CEO’s that are obsessed with short sellers.
Is the company financially healthy?
I discussed “low leverage” in the return on equity point, but there is more to financial health than low debt.
In addition to a low debt/equity ratio, I will also take a look at the following criteria to assess financial health: 1) Interest coverage, 2) Altman Z-Score (bankruptcy risk), 3) M-Score (a measure that looks for signs of earnings manipulation), 4) Returns on capital consistently exceed the cost of capital.
Has the company consistently generated returns for shareholders? Is the industry in secular decline?
I want companies that have already proven that they can generate returns for shareholders. I don’t want to speculate on companies without a proven track record. This means I will mostly avoid new & exciting companies. I’ll also avoid companies that appear to be in secular decline.
Has the company survived previous recessions?
The economic cycle is unpredictable. This is a lesson I learned the hard way because I’ve tried to predict it and failed at it.
I operate under the assumption that another 2007-09 recession can happen tomorrow. For that reason, I only want to hold companies that have proven themselves as able to endure past recessions without destroying shareholder value. If something had a 90% drawdown in 2008 and the firm was brought to the brink of bankruptcy, then I don’t want to own it in my portfolio.
This criteria is also for my own psychology. I’m a risk-averse individual. When the world is going to hell in a handbasket, I don’t want to panic sell at the bottom. If I own a business that has the ability to survive, then I can continue to hold it when inevitable macro trouble emerges.
Does the company have a moat?
I am looking for businesses with strong defenses against the competition. If a competitor can copy the company’s business model and kill it, then I’m not interested in owning it. If the product is commoditized and a lower price can cause customers to switch, then I’m not interested. I want businesses that have the ability to survive and are worthy of being held for long periods of time. I’m not interested in fads. I’m interested in businesses that will continue generating excess returns for the next 10 years.
Is the stock cheap on an absolute and relative basis?
I want to pick up bargain securities that trade with a margin of safety.
There are two reasons for this: 1) I want multiple appreciations to be a potential source of returns even though I don’t want to rely on it. 2) I don’t want to get killed by multiple compression.
Even excellent companies can undergo painful multiple compression. Coca-Cola in the late ‘90s was a wonderful business, but the market bid it up to a P/E of 50. It spent the next 10 years delivering zero returns to shareholders even while the underlying business grew.
I want the cheapness of the stock to be obvious. I am not trying to find a margin of safety by torturing a DCF until it gives me the answer I want. I want actual quantitative bargains with low multiples.
If I can maintain my discipline in this area, then it will keep me out of the hottest stocks and the hottest industries. That is by design.
If I was forced to hold the stock for 10 years, would I be terrified?
I want to own businesses worthy of being held and I want to own them at compelling prices. If the thought of being stuck in a stock for 10 years is terrifying, then I probably shouldn’t own it at all.
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Nothing on this substack is investment advice.
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