It’s not easy finding companies that generate high returns on capital and produce free cash flow in excess. Even if you screen for companies that do exactly that, you can’t be sure you’re looking at a bunch of quality investments.
Last week I ran a screen of companies that produced free cash flow every year for five years and an average return on invested capital of 25% or higher.
What I got back was a bunch of wonderful businesses and not so great investments. The price for these businesses left little room for growth or a margin of safety.
But sometimes you can you find a high compounder with great prospects. And that’s exactly what I found in Evercore Inc. (NYSE:EVR).
If you had to sum up a great company, what would it be?
One that produces a lot more capital than it takes? One that has a competitive advantage over its competitors?
Essentially you’re looking for a Warren Buffett stock – a wonderful business.
Now, if that is what you’re looking for, surely the best hunting grounds to find a Warren Buffett stock is to look at the stocks Warren Buffett holds himself.
So let’s jump right in…
How many cars do you own? One, two? Maybe even three?
It’s not uncommon for US households to own up to three cars. But how many cars do you think people in places like South American own?
Take Juan Garcia for example. Like every other city goer in Mexico City, Juan pays his taxes, works extremely hard to provide for his family. Oh yeah, and he owns multiple cars to drive on different days of the week.
And he’s just one of many who various cars in Mexico City.
For Aussie auto classified company, Carsales.com (ASX:CAR), it’s a huge opportunity. I’ll get to who they are and what they do in a moment. But first let’s explore why Carsales is so eager to jump into Latin America.
In a 2015 paper, S&P Dow Jones Indices showed more than 84% of US active funds underperformed the S&P 500 over a 12-month period. Over a 10-year period, only 2% of active funds outperformed their benchmark.
Similar results also popped up in Europe and the UK.
Its clear institutional investors don’t have all the answers. (more…)
There are many famed drop outs: Steve Jobs, Bill Gates, Mark Zuckerberg and Michael Dell. Surely one of the most famed serial entrepreneur and drop out is Richard Branson.
At 16, Branson gave up studies to start his own magazine business. The magazine was called ‘Student’. It was a mail order business, which created a revenue from advertising.
With a steady readership, Branson thought he could also sell other product within the magazines. That’s when he got the idea to sell records, via mail-order in his magazines. The idea was so successful in the first year that Branson decided to start his own record label and recording studio – Virgin Records.
His record company witnessed a huge success as high profile performers like the Rolling Stones and Sex Pistols signed under the label. Branson became millionaire by the age of 23. But it would seem like Branson had lost his mojo when he wanted to start up his own airline. Or so his business partners thought at the time.
Garbage in, garbage out.
It’s a phrase typically used when talking about forecasting. Because it’s such a subjective art, your forecasts are highly dependent upon the assumptions you make.
Lowering or increasing growth assumptions, discount rates and margins can drastically change what a financial model spits out. Hence, if your assumptions are garbage you’ll get a garbage valuation.
Like I’ve mentioned before, there’s nothing wrong with creating financial models and forecasts. You’ll gain an intimate knowledge of all three financial statements and how they work together if you model them yourself.
But remember forecasts and models are far from perfect.
And that’s businesses are not static, like financial models. They’re constantly changing as their industry, business cycle, regulation and consumer tastes change.
It’s why you should even be wary of the figures presented in an annual report. Accountants and auditors are paid to present businesses in the best light possible. So if there is a chance to artificially increase earnings out without breaking any rules, they’re going to do it.
It’s why hundreds of books, research papers and seminars are dedicated to the subject of earnings quality – finding out the real earnings of a business.
Compounders…they’re a rare breed. Even rarer is a compounder at a cheap price. Below I’ve created the following screen to make things a little easier for you.
It’s a simple screen. All I’ve done is compile companies which have grown free cash flow by a minimum of eight periods out of an 11-year stretch. I also made sure each business had an average return on invested capital of 20% or above over the same period.
At a glance, you can see there are some pretty big names in there. Apple, Inc. (NASDAQ:APPL), Priceline Group Inc. (NASDAQ:PCLN) and Moody’s Corp (NYSE:MCO) to name a few.