Strategy
I seek to invest directly in high quality companies that I intend to hold onto for decades.
Investment Strategy
I look for compounders, companies that can generate a high return on invested capital and have access to attractive opportunities to reinvest earnings.Established Compounders
Established compounders are companies that have reached a steady state of operations, demonstrating consistent growth and strong returns on invested capital. These are typically well known companies with a proven track record.
Some companies in this category include Visa, Moody’s, UnitedHealth, Google, and Facebook.
Emerging Compounders
Emerging compounders are companies that have not yet reached maturity. Typically high growth companies, these companies are focused on scaling their business. While these companies may have relatively low earnings or even losses due to aggressive investments, they typically demonstrate strong revenue growth and oftentimes positive cashflow.
I look for category leaders that are disrupting and innovating.
Given my position as an engineering leader at a high growth start-up in San Francisco, I have a unique perspective on up-and-coming technology companies. I tend to focus on growth efforts in that light.
Some names that fall into this category include CrowdStrike, Cloudflare, Upstart, and Okta.
Analysis
I look for high-quality companies; companies that have demonstrated strong performance and have a compelling narrative for the future.
Regardless of the investment strategy, I gauge the quality of a company through two primary lenses: fundamental and qualitative analysis.
Fundamental
Fundamental analysis covers the company’s metrics – primarily their operations and balance sheet. The primary data points I consider are:
- Return on invested capital – a measure of a company’s earnings relative to the resources required to operate (i.e. capital, including debt and equity)
- Revenue growth – consistency over time and future expectations
- Net debt/cash – debt can be healthy or it can be destructive; viewed relative to earnings and market capitalization
Other considerations include:
- Free cash flow – operating and free cash flow, at the company level and per share
- Earnings – adjusted and GAAP earnings, at the company level and per share
- Margins – gross and net profit margins, considering also the stability and trend
- Shares outstanding – increasing (raising capital) or decreasing (share buy-backs)
Qualitative
Qualitative assessment provides a unique insight into the future prospects of the company. Key considerations include:
- Moat – unique and durable competitive advantages
- Management – executive team’s track record and past experiences
- Market – size of their total addressable market, favorable industry trends
- Culture – mission, vision, values, employee perception
- Margin of safety – understanding risks and containment of any impact