The Tenets of an Investable Company

May 18, 2021 | Spencer Glenn


The Tenets of an Investable Company

There are several qualitative and qualitative factors that are involved with portfolio management and security selection. Below we distilled a short list of some of the quality factors used as criteria for evaluating investment opportunities.

  1. Intelligent management teams with strong integrity and iterate quickly to adapt to economic changes
    1. Foster high talent density with expertise and competency,
    2. Working in shareholders’ best interest with a high degree of integrity and honesty,
    3. A track record of outperformance
    4. Material equity ownership

Example: Netflix Inc. (NFLX-N)

  1. Recurring revenue
    1. Subscription based revenues > one time, single purchases

Example: Microsoft Corp. (MSFT-N), Autodesk Inc. (ADSK-N)

  1. Recession proof demand,
    1. Offers products and services that are in-demand through all parts of the economic cycle, allowing the company to compound earnings in good and bad years

Example: Estee Lauder (EL-N), Costco Wholesale (COST-N), Intuit Inc. (INTU-N)

  1. Organic Growth
    1. Growing by increasing sales of internally developed products and services,
    2. Inorganic growth is growth strictly from mergers and acquisitions
    3. Organic growth > Inorganic growth

Example: PayPal Holdings Inc. (PYPL-N)

  1. High and expanding gross margins
    1. Indicates that the company’s products/services create a significant amount of value for the customer
    2. Rising gross margin also indicates pricing power

Example: Zoetis Inc. (ZTS-N)

  1. Widening Moat
    1. Capitalism is brutal. A Widening moat will protect a company’s profits from competition
    2. Examples:
      1. Network effects: Facebook Inc. (FB-N)
      2. Switching costs: Adobe Inc. (ADBE-N)
      3. Durable Cost Advantage: Waste Connections Inc. (WCN-T), SBA Communications Corp (SBAC-N)
      4. Premium Brand: Apple Inc. (AAPL-N)
  1. Operating Leverage
    1. If a company can grow its costs at a slower rate than revenue then its profits will grow at a FASTER than revenue

Example: Taiwan Semiconductor Mfg Co. (TSM-N), Intuitive Surgical, Inc. (ISRG-N)

  1. Low-cost customer acquisition
    1. The best marketing is no marketing
    2. Great companies create demand through word of mouth and spend little on sales and marketing

Example: Alphabet Inc. (GOOG-N)

  1. Diversified Revenue
    1. Companies that depend on a few customers for most of their revenue are fragile
    2. One customer leaving can ruin the investing thesis
    3. Great businesses serve thousands of customers, not just a few big ones

Example: Microsoft Inc. (MSFT-N)

  1. Reinvestment Opportunities
    1. Great businesses can reinvest profits back into themselves at high rates of return for long periods of time This continuously grows the profit stream, which will eventually lead to share price appreciation

Example: Constellation Software Inc. (CSU-T), (TOI-V)

  1. Companies that produce profits have far more control over their destiny than companies that don’t
    1. Both net income and free cash flow are positive and continue to grow

Example: Alimentation Couche-Tard (ATD’B-T), Starbucks Corp. (SBUX-N), Sherwin-Williams Co. (SHW-N)

  1. Optionality
    1. Great companies create new revenue opportunities for themselves by launching new products/services that open up new markets

Example: (AMZN-N)

  1. Scale and Total Addressable Market (TAM)
    1. Own companies that have only captured a small fraction of their opportunity
    2. Creates a long runway for continued growth

Example: Visa Inc. (V-N), and Mastercard Inc. (MA-N)

  1. Price maker (not a price taker)
    1. Price maker companies that sell commodities have no control over the price of their product.
    2. Own price makers, not price takers

Example: Canadian National Railway (CNR-T), Canadian Pacific Railway Ltd. (CP-T)

  1. Pristine Balance Sheet
    1. Cash-rich companies get stronger in downturns, and can survive most economic calamities
    2. Debt-laden companies get weaker in downturns

Example: Berkshire Hathaway Inc. (BRK’B-N), Royal Bank of Canada (RY-T)


Disclaimer: none of the companies mentioned in the proceeding post are suggestions and should not be taken as investment recommendations. The mentioned companies are included strictly for illustrative purposes and should not be construed as investment advice.