Portfolio Screen August 2017

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.

But understand that some duds could have slipped through the cracks. For example, World Acceptance Corp (NASDAQ:WRLD) does have an average ROIC over 11-periods. However, it’s been declining over time and now sits above 9%.

So just be mindful that there are some outliers that got into the mix.

Other than that, I encourage you to research the companies above future. While great past performance might not continue into the future, you might want to determine if the companies have an economic moat present, what it is and whether it will be durable heading into the future.

I’ve also creating a screen of some younger compounders. All economic moats fade with time. You’re returns will skyrocket if you get into a compounder before it’s reached ‘compounder’ status.

There are a lot of similar names in both screens. The second only includes company that have had growing free cash flow periods of four or more over a six year period. The average return on invested capital over the same time is 20% and above.

Happy hunting.

PS: Investing requires you to generate a lot of ideas and read a lot of annual reports. As Peter Lynch says, the one who turns over the most rocks is the one that wins.

So get to it and start turning over as many rocks as you can. Be creative when coming up with investment ideas and make sure you’re always mindful of downside risks.

If you wanted to check out why compounders are such good investment, check out a post I wrote ‘The Only Two Investments You’ll Ever Need’.

Or if you’re feeling like you’re starting to favour one or two companies a little too much, check out a post I wrote about overcoming biases. You can read that here.