Long_Equity
Long_Equity
Concentrated Global Equity Fund | ROC + FCF | Linear Compounders | Value Creation + Pricing Power | “There’s never a bad time to buy a compounding machine.”
0Follow
1065Followers
0Topic
0Badge

The mental model for thinking about a company's growth

Here's a mental model for thinking about a company's growth:• Is the growth rate high?• Is the growth predictable?High + Predictable = InvestableAnything else = Perhaps best to avoidWhere do you invest?ImageHere's my mental model for understanding how value creation, pricing power, barriers to entry and switching costs all come together.VALUE CREATION: Profit growth requires selling more, raising prices and cutting costs.PRICING POWER: Raising prices requires pricing power. Customers only put up with price hikes if there is no alternative (unique product), if the alternative is lower quality (superior product), if the alternative is a higher price (cheaper product) or if using the alternative is inconvenient (switching cost).BARRIERS TO ENTRY: There is only no alternative if companies can'
The mental model for thinking about a company's growth
avatarLong_Equity
12-22 10:39

Mental Model: Understanding Value Creation, Pricing Power, Barriers to Entry

Here's my mental model for understanding how value creation, pricing power, barriers to entry and switching costs all come together.VALUE CREATION: Profit growth requires selling more, raising prices and cutting costs.PRICING POWER: Raising prices requires pricing power. Customers only put up with price hikes if there is no alternative (unique product), if the alternative is lower quality (superior product), if the alternative is a higher price (cheaper product) or if using the alternative is inconvenient (switching cost).BARRIERS TO ENTRY: There is only no alternative if companies can't replicate their competitors. Competitors can't replicate if they don't know how (knowledge barrier), don't have the capability (capability barrier), don't have the resource (resource barrier) or aren't all
Mental Model: Understanding Value Creation, Pricing Power, Barriers to Entry
avatarLong_Equity
12-20 22:01

Blue Whale Capital's Holdings

Here's how the holdings of Blue Whale Capital rank based on various metrics for quality and growth.Which do you hold?This is a list of 33 companies. I note their factsheet says they hold 28. So 5 of these companies are no longer held.It's a odd to see such significant exposure to gambling ( $Evolution(EPM)$ , $Flutter Entertainment PLC(FLUT)$ , $DraftKings Inc.(DKNG)$ ), tobacco ( $Philip Morris(PM)$ ) and oil/gas ( $Canadian Natural Resources(CNQ)$ ).Image
Blue Whale Capital's Holdings

Quality Investing has crushed Value Investing

Over the last 15 years, quality investing has crushed value investing.• The MSCI's quality index has an average outperformance of 2.71%, compared to -2.32% for their value index.• Quality has outperformed in 11/15 years, while value only managed 5/1• Quality delivered the lowest volatility (SD=4.36%).Critics may argue that 15 years is a short time frame, but the consistency and lower volatility speaks for itself.Maybe, but most of the performance is free cash flow growth, which may continue into the future.ImageThe MSCI World Quality index has outperformed the MSCI World index 10 out of the last 14 years.Image
Quality Investing has crushed Value Investing

AMAT - There's more than one type of growth

$Applied Materials(AMAT)$ supplies equipment to the semiconductor industry. Over the last 5 years AMAT has grown.But when we say a company has grown, what precisely does that mean?Companies have many parts to them. Each part can grow at different rates.Let's consider AMAT's growth over the last 5 years.Revenue has grown by 9.7% per annumGross profit has grown 10.5% per annumOperating profit has grown 11.3% per annumNet income has grown 17.7% per annumFree cash flow has grown 19.1% per annumFree cash flow per share has grown 23.9% per annumShare price has grown 29.0% per annumAs you work down the above list you will notice that the percentage growth numbers are going up.Companies with pricing power see their gross profit grow faster than their reve
AMAT - There's more than one type of growth

Here's my updated list of compounders

UPDATED: Here's my updated list of compounders.NEW: $Cavco(CVCO)$ $Cboe Global Markets, Inc(CBOE)$ $CommVault(CVLT)$ $Medpace(MEDP)$ Imagine having access to 15+ quality growth metrics for each of company (including cash return on capital, growth and valuation)?If that sounds interesting to you, then check this outImageyou can gain access to this spreadsheet and research notes - link below:ImageFor each company you get their share price linearity:ImageYou get the stability and expansion of their FCF marginsImageYou get their current valuation and their historic valuation... and so much more.Image
Here's my updated list of compounders

HD & COST - The companies with low margin volatility

Home Depot $Home Depot(HD)$ (GM = 34%) and Costco $Costco(COST)$ (GM = 13%) don't have the highest gross margins, but what their gross margins do have is low volatility.These are incredibly stable companies.Here’s a list of other companies with low margin volatility. $Relx PLC(RELX)$ $Genmab A/S(GMAB)$ $Esker SA(ESKEF)$ $Dollar General(DG)$ $Kesko OY(KKOAF)$ $Sage Group plc (The)(SGPYY)$ $AutoZone(AZO)$
HD & COST - The companies with low margin volatility

Here are some of my favourites

Here are some of my favourites:- S&P Global and Moody’s $S&P Global(SPGI)$ $Moody's(MCO)$ - Visa and Mastercard $Visa(V)$ $MasterCard(MA)$ - Coke and Pepsi $Coca-Cola(KO)$ $Pepsi(PEP)$ - Fisher & Paykel and Resmed $Fisher & Paykel Healthcare Corp. Ltd.(FSPKF)$ $ResMed(RMD)$ - Cadence and Synopsys $Cadence Design(CDNS)$ $Synopsys(SNPS)$ - ADP and Paychex
Here are some of my favourites

What's the best part of the semiconductor supply chain to invest in?

What's the best part of the semiconductor supply chain to invest in?I ran some quality growth metrics for each part. Here are some helpful findings:- CAPEX: The highest capital expenditure is found in the fabs (so $Taiwan Semiconductor Manufacturing(TSM)$ $GLOBALFOUNDRIES Inc.(GFS)$). Although high levels are also found with chip designers.- SBC: High levels are found particularly with the EDAs (so $Cadence Design(CDNS)$ and $Synopsys(SNPS)$ ), and also some of the designers ( $NVIDIA Corp(NVDA)$ ).- ROC: High levels are found with the EDAs and equipment manufacturers.- Growth: H
What's the best part of the semiconductor supply chain to invest in?

Why I don’t invest in the S&P 500?

Why I don’t invest in the $.SPX(.SPX)$ :- only 25% of the index has a FCF/share growth greater than 15%- only 26% of the index has a return on capital greater than 12%- only 12% of the index has both of the above- I don’t want to own banks, airlines and energy companies- I don’t want to own anything discretionary- I don’t want to own alcohol, tobacco or gambling stocks- I don’t want to own anything highly leveraged or highly cyclicalWhat would you add? $SPDR S&P 500 ETF Trust(SPY)$ $E-mini S&P 500 - main 2412(ESmain)$ Personally, I've always been wary of the S&P 500's emphasis on mega-cap stocks. I think there are better growth opportunities in sm
Why I don’t invest in the S&P 500?

Top performers in November 2024: $FTNT $FICO

Portfolio at the end of November 2024November performance: +8.8%YTD: 27.6%We began a new position in ATOSS Software. The top contributors to performance were $Fortinet(FTNT)$ and $Fair Isaac(FICO)$ . The top detractors from performance were $KLA-Tencor(KLAC)$ and $Applied Materials(AMAT)$ .FCF ROC = 38%FCF per share CAGR (5yr) = 24%FCF Linearity (5yr) = 0.94FCF Margin Expansion (5yr) = 6%FCF Yield = 2.73%ImageTake a look at the below table. AMAT and KLA have higher and more consistent FCF per share growth. $ASML Holding NV(ASML)$ generally has lower returns on capital and higher
Top performers in November 2024: $FTNT $FICO

Share price drop doesn't mean cheaper

A lot of investors have a “what goes down, must come up” mentality.The more the share price comes down, the more interested they are in the stock.There seems to be little consideration of whether the quality of the company is improving, just whether its share price is coming down.The idea that a drop in share price means the company is now cheaper is flawed.Share price can actually rise and valuation come down, but this requires the FCF per share to go up more than share price. $.SPX(.SPX)$ $SPDR S&P 500 ETF Trust(SPY)$ $.IXIC(.IXIC)$ $Invesco QQQ(QQQ)$ $NASDAQ 100(NDX)$
Share price drop doesn't mean cheaper

The companies that deserve close attention

Here are some of the companies that I follow closely, but don’t currently own:- Synopsys $Synopsys(SNPS)$ - Cerillion $Cerillion PLC(CRLLF)$ - $Nemetschek AG(NEMTF)$ - $Qualys(QLYS)$ - Technology One $Technology One, Ltd.(THNOF)$ - Arista Networks $Arista Networks(ANET)$ - IDEXX $IDEXX Laboratories(IDXX)$ - Texas Instruments $Texas Instruments(TXN)$ - ASML $ASML Holding NV(ASML)$ - DISCO
The companies that deserve close attention

Best MSCI Index: Robotics, AI & Cloud Outperforms

What's the best MSCI Index to follow?Since 2010, the MSCI Robotics, AI & Cloud index has outperformed 13 out of 14 years.It's average CAGR is 22%, which is a 11% outperformance of the broader market, i.e. MSCI World.At the bottom we have energy and materials.ImageSome companies are in MSCI Robotics $NVIDIA Corp(NVDA)$ $Broadcom(AVGO)$ $SAP SE(SAP)$ $Apple(AAPL)$ $Amazon.com(AMZN)$ $Alphabet(GOOG)$ $Alphabet(GOOGL)$ $Microsoft(MSFT)$
Best MSCI Index: Robotics, AI & Cloud Outperforms

What matters more - FCF growth rate or FCF yield?

What matters more - FCF growth rate or FCF yield?The correlation between the share price growth rate and the FCF/share growth rate is higher (left), than the correlation between the share price growth rate and the change in FCF yield (right).I used 10 year data for the $.SPX(.SPX)$ . $SPDR S&P 500 ETF Trust(SPY)$ $E-mini S&P 500 - main 2412(ESmain)$ ImageImageWhat I take from your chart is that over the course of 1 year the multiple impacts 46% of performance, which then drops rapidly to just 5% over 10 years. So yes, I think both charts are explaining the same thing. Over the short term, the multiple is just noise.
What matters more - FCF growth rate or FCF yield?

The highest quality companies in the Fundsmith/Smithson

What are the highest quality companies in the Fundsmith/Smithson investable universe?I took the complete set of holdings from both funds and ran it through one of my custom quality filters.Here are the ones that rise to the top 👇🏼👇🏼Which do you own? $MSCI Inc(MSCI)$ $Microsoft(MSFT)$ $Novo-Nordisk A/S(NVO)$ $Alphabet(GOOG)$ $Alphabet(GOOGL)$ $Apple(AAPL)$ $Fortinet(FTNT)$ $Visa(V)$ $Meta Platforms, Inc.(META)$ I
The highest quality companies in the Fundsmith/Smithson

Capital-light compounders

Investors often talk about compounding and when they do - donuts and snowballs are often used as illustrations.🍩 The ring of a donut resembles the compounding cycle of retaining profits from the previous year to reinvest for the following year.❄️ And if animations are to be trusted, a ball of snow rolling down a hill can start small, but gradually becomes larger and larger, just like the compounding's snowball effect.In this post, I’ll explore how different Returns on Capital (ROC) and growth rates can impact the compounding process and explain why even small adjustments can create a huge difference in your returns over time.1. High ROC + Low Growth Rate: Flatline SnowballsWhile investors in compounders often emphasise the importance of consistently high returns on capital, they often negl
Capital-light compounders

Here's a quick look at ATOSS Software!

Here's a quick look at ATOSS Software...What are your thoughts?⬇️⬇️⬇️📈 Share price up 415% since 1999.ImageCash return on capital consistently above 20%, but also growing (currently over 60%).Image Free cash flow and dividends have both grown substantially over the decadesImage Pricing power is strong... the below is from my research note on ATOSS.Image Since 2020, the company's valuation has de-rated slightly, so is now at a more attractive valuation.ImagePS:Two things you can do to become a better investor:1. Limit the number of companies you own2. Limit how frequently you tradeThis forces you to only own your best ideas and to accept that there will always be an opportunity that you miss out on.
Here's a quick look at ATOSS Software!

Here's four quality growth dashboards

Here's four quality growth dashboards, covering: $Atlas Copco AB(ATLRF)$ $HMS Networks AB(HMNKF)$ $.IXIC(.IXIC)$ $Invesco QQQ(QQQ)$ $NASDAQ 100(NDX)$ $E-mini Nasdaq 100 - main 2412(NQmain)$ $Veeva(VEEV)$ Which stand out to you?ImageYear 1 - you invest $20 and make $10Year 2 - you invest $10 and make $5Year 3 - you invest $5 and make $2.50Your ROC is 50%, but your annualised growth rate is -50%.That’s why ROC and growth both matter. Look for both.Year 1 - you invest $20 and make $10Year 2 -
Here's four quality growth dashboards

Here are four essential ratios for analysing companies

Here are four essential ratios for analysing companies:1. Growth. Consider both revenue and free cash flow. Consider both the short term and long term. Look for consistency. Consider the impact of buybacks on per share growth metrics.2. Margins. Look for margins that are widening over time, allowing FCF growth to outpace revenue growth. Consider each expense separately (e.g. COGS, R&D, CAPEX).3. Return on capital. Look for a consistently high number and a low payout ratio. Consider the company’s debt level and interest expense.4. FCF yield. Consider whether the growth rate justifies the valuation. Be mindful of stock-based compensation.What would you add?
Here are four essential ratios for analysing companies

Go to Tiger App to see more news