Jump to content

Base Hit Investing - Calculating the Return on Incremental Capital Investments.


doughishere
 Share

Recommended Posts

I dont know the guy...knowing my tweeter circles hes probably on here but John over at Base Hit Investing is very very very good.......

 

Calculating the Return on Incremental Capital Investments. http://basehitinvesting.com/calculating-the-return-on-incremental-capital-investments/

 

 

 

There are numerous ways to calculate both the numerator and denominator in the ROIC calculation, but for now, stay out of the weeds and just focus on the concept: how much cash can be generated from a given amount of capital that is invested in the business? That’s really what any business owner would want to know before making any decision to spend money.

 

 

 

Nothing revolutionay but i like to hear gospel.

Link to comment
Share on other sites

I think the calculation is undervaluing dividends. The dividends get valued at face value after the 10 year period but of course they are paid out during the period at which point I can reinvest them somewhere else at the same ROIC! I'm not arguing against a compounder but if a company does not have high ROIC investment opportunities and it distributes the excess cash via dividends to me, at which point I invest it with a high ROIC (which could be again investing in a business without good reinvestment opportunities, provided it's significantly undervalued) I can get similar results as investing in a compounder in the first place!

 

Of course, one gets mediocre results if a company without good ROIC reinvestment opportunities deploys the cash at bad ROIC or (even worse) just keeps it on the balance sheet. It needs to distribute the cash so I can deploy it somewhere else to achieve good investment returns.

Link to comment
Share on other sites

I think the calculation is undervaluing dividends. The dividends get valued at face value after the 10 year period but of course they are paid out during the period at which point I can reinvest them somewhere else at the same ROIC! I'm not arguing against a compounder but if a company does not have high ROIC investment opportunities and it distributes the excess cash via dividends to me, at which point I invest it with a high ROIC (which could be again investing in a business without good reinvestment opportunities, provided it's significantly undervalued) I can get similar results as investing in a compounder in the first place!

 

Of course, one gets mediocre results if a company without good ROIC reinvestment opportunities deploys the cash at bad ROIC or (even worse) just keeps it on the balance sheet. It needs to distribute the cash so I can deploy it somewhere else to achieve good investment returns.

 

+1. I don`t know if it was Buffet who said that, but the best investment is one that grows without reinvestment of capital like See`s Candy and throws of a lot of free cash on its way. This whole compounder stuff is way overrated since ROIC is mean reverting. Number one determinant of future rate of return is price paid, every backtest that i have seen confirms that. ROIC doesn`t even have an impact on returns, this was highlighted in "Deep Value".

Link to comment
Share on other sites

This whole compounder stuff is way overrated since ROIC is mean reverting. Number one determinant of future rate of return is price paid, every backtest that i have seen confirms that. ROIC doesn`t even have an impact on returns, this was highlighted in "Deep Value".

 

To find "compounders", you need a qualitative assessment of the reinvestment opportunities. Backtests are quantitative.

 

Finding a compounder that you can understand with high ROIIC, long runway, strong moat, and fair price is extremely rare.

 

Link to comment
Share on other sites

And you don't really need it if you are preserving wealth. There you just need to be very careful not to make bad decisions and turn a guaranteed success into a severe failure. If you don't have that much capital, then you have to make a decision what you want to do, go for a potential fast run but an equally fast crash. If you diversify too much you end up with the wealth preservation type returns or slightly better, if you concentrate well you take the risks for the potential gains - like an entrepreneur.

Link to comment
Share on other sites

To find "compounders", you need a qualitative assessment of the reinvestment opportunities. Backtests are quantitative.

Finding a compounder that you can understand with high ROIIC, long runway, strong moat, and fair price is extremely rare.

 

Yes, but a qualitative assessment is subjective. For example i wouldn`t put CMG into that basket. My problem is that everybody talks about this subject and thinks that for example BRK belongs into that pocket. But its nothing special to compound capital at 10% like BRK or MKL did during the last decade, in fact i have plenty of companies on my list that did that and 10% is the long run average ROIC for american companies. Most of the time it will be better to just get the money out as dividends or sharebuybacks where i can invest it at higher rates.

 

And for the companies where growth was higher in the past there is always a question mark if they can sustain that level of growth. If the answer is yes fine, but often when the answer is no and you find it out too late the investment results can be a disaster. In the end when you want to invest in companies with growth of >20% most of the time you are a momentum investor. Theres nothing wrong with that, but you should be aware of that fact.

Link to comment
Share on other sites

The best companies, in my opinion, are ones that can invest large amounts of capital at high rates of return. If a company can earn 30% on incremental invested capital, I want that company to keep its earnings and reinvest them. If they instead pay it out in dividends, then I have to reinvest it at my own rate of return. While I don't have a multi-decade track record yet, I'm pretty confident my long-term expected IRR is not 30% (I also have to pay taxes on the dividends which I didn't factor in). Of course no company can earn 30% forever so eventually it has to slow down and pay dividends.

 

The better investor you are and the more life you have ahead of you, the more you should want dividends. Buffett receiving dividends early in his career that he could compound at 20% for 40 years are worth a lot more than dividends paid to a retail investor.

Link to comment
Share on other sites

I think the calculation is undervaluing dividends. The dividends get valued at face value after the 10 year period but of course they are paid out during the period at which point I can reinvest them somewhere else at the same ROIC! I'm not arguing against a compounder but if a company does not have high ROIC investment opportunities and it distributes the excess cash via dividends to me, at which point I invest it with a high ROIC (which could be again investing in a business without good reinvestment opportunities, provided it's significantly undervalued) I can get similar results as investing in a compounder in the first place!

 

Of course, one gets mediocre results if a company without good ROIC reinvestment opportunities deploys the cash at bad ROIC or (even worse) just keeps it on the balance sheet. It needs to distribute the cash so I can deploy it somewhere else to achieve good investment returns.

 

+1. I don`t know if it was Buffet who said that, but the best investment is one that grows without reinvestment of capital like See`s Candy and throws of a lot of free cash on its way. This whole compounder stuff is way overrated since ROIC is mean reverting. Number one determinant of future rate of return is price paid, every backtest that i have seen confirms that. ROIC doesn`t even have an impact on returns, this was highlighted in "Deep Value".

 

Good points.  I think there is so much interest around the compounders because we've gone through a multi-decade bull market and everyone sees a TDG, POOL, BRK, etc, and they think how much better it must be to buy something to compounds tax deferred forever. Well yeah, of course that's better.  But actually investing the bulk of your portfolio in a compounder at the end of a 25 year bull market in both stocks and bonds is not an easy task.

 

I know it's in bad form to take someone from this forum as an example, but take a look at gio.  He's posted like 6000 times so it's a decent sample size.  He's picked out all these "compounders" in the past, and almost every one mean reverted.  He bought into Apple, and now it looks like he bought right as iPhone sales peaked.  He bought into Oaktree, then realized it wasn't that great.  He bought into Nomad, then realized it wasn't great.  Bought into Valeant, and then realized it wasn't great.  Now he's buying into Google, Nike, Amazon, etc.  In the search of finding compounders I don't think he's stuck with a single one?  That just defeats the purpose of investing in compounders.  You might as well have found a crapload of cigar butts over that time frame.  Now it just looks like he's long the S&P 500 at peak everything. 

 

Buffett probably identified less than 20 "compounders" over his entire lifetime that he was able to buy at the right price.  But he did it during one of the biggest economic bull markets in history.  That's a hell of a tailwind to be long a compounder.  And he's probably 50x better than most of us at finding something that can keep compounding.  How long will you wait to invest your portfolio in these compounders and be willing to sit through nasty bear markets, changes in the economy, changes in competitive advantages, you name it.  It's incredibly hard.  Look at something like Walmart today.  It looked like a great compounder back in 1995 and now no one wants to own it.

 

Anything that looks like a good compounder today is incredibly expensive.  30x, 50x, or 1000x for AMZN.  It would be nice to find the next WBA, BDX, CHD, XOM or MO but it's nearly impossible to do in practice.

 

But if you guys come across any cool compounding machines that isn't Amazon, let me know.  Out of the thousands of threads on this board, I'm not aware of any others that look like real high ROIIC compounders. 

Link to comment
Share on other sites

IBKR (although I'm sure you're already aware of them). That's the only company I own that I think could be a long-term compounder.

 

IBKR is growing, but is it because it reinvests its capital or would it grow without it? For me this is a business that doesn`t need to reinvest its money, because the business scales so well (at least in theory). The problem is they reinvest it into higher wages and more developers. Is this necessary (and what is the return on investment here) or could the money be used for higher returns on other uses?

The problem with ROIC is that it masks the real "return on investment", it is just an accounting number. You don`t know why earnings were growing, it could be inflation, price increases, a consumer fad, higher/lower commodity prices, organic volume growth etc. It doesn`t necessarily come from reinvestment of earnings.

Link to comment
Share on other sites

Although it was noted couple times in original article, finding a long term high compounder at somewhat reasonable price is very very hard.

 

First, you have to start at pretty small company, since even 20% compounding for 20 years is something like 38 bagger. So maybe max 10B market cap at investment time and probably lower (1B?), since you also need a huge runway for the 20% growth for 20 years. If you want 25% compounding it's even worse (86x). OTOH, if you want only 15% compounding then we are down from hypercompounders and you might get it with somewhat regular companies - but you also might not satisfy people who want to hugely outperform the index (especially if some of their other picks crash and burn).

 

So max 10B market cap, 20%+ growth rate, probably less than 30x PE, huge runway? Even IBKR doesn't qualify. I tried to look at some potentials. ILMN - no. REGN - no. TDG - maybe barely, but does it really have 20 year runway? EXOSF - doubt it will grow 20%, especially long term. Maybe some Liberties? TRIP - barely under 10B, does it really have 20 year runway? CMPR - maybe, but will it grow 20%, does it have long runway? FIT - maybe if it survives and becomes category buster (it can just crash and burn though).

 

Edit: if you can find a huge compounder at 10-100M market cap, that could work great. But usually that means untested companies that for some reason pivot or positively explode. Usually 10-100M market caps are not clear moat/clear huge runway companies, so it's hard to predict 20 years. But yeah something like next CMG or PNRA maybe. Next TJX. If you buy at 10-100M, you don't need a category buster, just something that is good business and can capture reasonable piece of market share. It's still hard IMO, but for some people maybe easier than picking 1B+ winners.

Link to comment
Share on other sites

Although it was noted couple times in original article, finding a long term high compounder at somewhat reasonable price is very very hard.

 

First, you have to start at pretty small company, since even 20% compounding for 20 years is something like 38 bagger. So maybe max 10B market cap at investment time and probably lower (1B?), since you also need a huge runway for the 20% growth for 20 years. If you want 25% compounding it's even worse (86x). OTOH, if you want only 15% compounding then we are down from hypercompounders and you might get it with somewhat regular companies - but you also might not satisfy people who want to hugely outperform the index (especially if some of their other picks crash and burn).

 

So max 10B market cap, 20%+ growth rate, probably less than 30x PE, huge runway? Even IBKR doesn't qualify. I tried to look at some potentials. ILMN - no. REGN - no. TDG - maybe barely, but does it really have 20 year runway? EXOSF - doubt it will grow 20%, especially long term. Maybe some Liberties? TRIP - barely under 10B, does it really have 20 year runway? CMPR - maybe, but will it grow 20%, does it have long runway? FIT - maybe if it survives and becomes category buster (it can just crash and burn though).

 

Edit: if you can find a huge compounder at 10-100M market cap, that could work great. But usually that means untested companies that for some reason pivot or positively explode. Usually 10-100M market caps are not clear moat/clear huge runway companies, so it's hard to predict 20 years. But yeah something like next CMG or PNRA maybe. Next TJX. If you buy at 10-100M, you don't need a category buster, just something that is good business and can capture reasonable piece of market share. It's still hard IMO, but for some people maybe easier than picking 1B+ winners.

 

Let's take it a step further then because I think this is a good line of thinking.  What are the companies in the 10-100M mcap range?  They're old ruddy duddy companies that don't have much potential.  Or they're hyped up brand new revolutionary change the world fantasies.  The companies in this range that are true compounders are still private.  They're the tech companies everyone here loves to crap on because "they're too hard to understand."

 

Venture capital has stolen most potential for investor return by being there at the start.  The SEC takes blame as well.  VC didn't exist in its current form 25-30 years ago, or even longer when Buffett was doing this.  If a person had an idea they could do a small IPO to raise capital.  Now there are angel funds, there are VC funds, there are private investors.  There is such a large network of people with money that want to invest it's almost pointless for a company to go public.  I've looked at this myself with my own company.  I considered raising capital for a while and spoke to a number of people.  In theory I could have done an IPO, but why?  It's costly, I'd have regulation, and the public investor who own shares wouldn't do squat for me.  Verses going with a VC or investor they could provide advice, contacts and connections that would be helpful and move the ball forward.  There is also only one or two investors to please rather than hundreds or thousands, and it would still be private.  I don't think there's much of an incentive to be public anymore.

 

What we get are crazy compounders going public after the best time to invest is gone.  Think of Facebook, great returns on capital if you're a VC.  I don't know what this means, but taking the very long view I think investing is changing dramatically.  The tiny small companies that I love to invest in will probably cease to exist in the next twenty years.  The number of dark companies is falling off the map quickly.  Most of these companies have older execs who will end up selling to a private company.  This will leave the small caps to the over hyped crap companies.  Then at the mid and top tier you have all of the growth companies who's growth is slowing where the Founder or VC wants to exit, gain liquidity and dump their shares on the public market. 

 

If we fast forward I think what we're going to be left with is a market of mid to larger companies whose best growth is far behind them.  It's really hard to get excited about investing in a market like that.  Maybe investors will leave quickly and there will be bargains?  I don't know.  I could also see a scenario where a number of companies continue to go private and the market becomes a shadow of itself as well.

Link to comment
Share on other sites

Very interesting line of thought. I'd add a few more things to think about in terms of compounders.

 

(1) It seems tough to look for a compounder based off revenue growth alone. There are four growth levers in my opinion (revenues, margins, multiple, buybacks). If the company can buy back 5% of shares outstanding for 20 years, that's a 3x off that amount alone.

 

(2) Remember to adjust your ideas of what's possible based on the world 20 years from now and not the current world. Apple's $500 billion market cap might be the upper bound now, but 20 years from now, the upper bound will likely be $1 trillion or higher. The means, if you're trying to go backwards, you can likely raise your search to companies above $10 billion but probably below $25 billion for the 38x return.

Link to comment
Share on other sites

Merkhet, even with market cap inflation 25B is pushing it. You are still talking about AAPL equivalent - a company that pretty much takes over a huge huge area. So FIT - maybe if they dominate on-person-health-monitoring-and-care. IBKR - probably not.

 

Of course, as I said, you can lower your expectations to perhaps 18% growth, perhaps 10-15 years, then more companies would qualify.

 

Oddball, I think I am more optimistic. One possibility is spinoffs. CMG and PNRA were spinoffs. So something like that. That's why Liberties and their pieces could be attractive maybe. But, yeah, I agree that the private-forever could be issue for investors. We'll see.

Link to comment
Share on other sites

Although it was noted couple times in original article, finding a long term high compounder at somewhat reasonable price is very very hard.

 

First, you have to start at pretty small company, since even 20% compounding for 20 years is something like 38 bagger. So maybe max 10B market cap at investment time and probably lower (1B?), since you also need a huge runway for the 20% growth for 20 years. If you want 25% compounding it's even worse (86x). OTOH, if you want only 15% compounding then we are down from hypercompounders and you might get it with somewhat regular companies - but you also might not satisfy people who want to hugely outperform the index (especially if some of their other picks crash and burn).

 

So max 10B market cap, 20%+ growth rate, probably less than 30x PE, huge runway? Even IBKR doesn't qualify. I tried to look at some potentials. ILMN - no. REGN - no. TDG - maybe barely, but does it really have 20 year runway? EXOSF - doubt it will grow 20%, especially long term. Maybe some Liberties? TRIP - barely under 10B, does it really have 20 year runway? CMPR - maybe, but will it grow 20%, does it have long runway? FIT - maybe if it survives and becomes category buster (it can just crash and burn though).

 

Edit: if you can find a huge compounder at 10-100M market cap, that could work great. But usually that means untested companies that for some reason pivot or positively explode. Usually 10-100M market caps are not clear moat/clear huge runway companies, so it's hard to predict 20 years. But yeah something like next CMG or PNRA maybe. Next TJX. If you buy at 10-100M, you don't need a category buster, just something that is good business and can capture reasonable piece of market share. It's still hard IMO, but for some people maybe easier than picking 1B+ winners.

 

Let's take it a step further then because I think this is a good line of thinking.  What are the companies in the 10-100M mcap range?  They're old ruddy duddy companies that don't have much potential.  Or they're hyped up brand new revolutionary change the world fantasies.  The companies in this range that are true compounders are still private.  They're the tech companies everyone here loves to crap on because "they're too hard to understand."

 

Venture capital has stolen most potential for investor return by being there at the start.  The SEC takes blame as well.  VC didn't exist in its current form 25-30 years ago, or even longer when Buffett was doing this.  If a person had an idea they could do a small IPO to raise capital.  Now there are angel funds, there are VC funds, there are private investors.  There is such a large network of people with money that want to invest it's almost pointless for a company to go public.  I've looked at this myself with my own company.  I considered raising capital for a while and spoke to a number of people.  In theory I could have done an IPO, but why?  It's costly, I'd have regulation, and the public investor who own shares wouldn't do squat for me.  Verses going with a VC or investor they could provide advice, contacts and connections that would be helpful and move the ball forward.  There is also only one or two investors to please rather than hundreds or thousands, and it would still be private.  I don't think there's much of an incentive to be public anymore.

 

What we get are crazy compounders going public after the best time to invest is gone.  Think of Facebook, great returns on capital if you're a VC.  I don't know what this means, but taking the very long view I think investing is changing dramatically.  The tiny small companies that I love to invest in will probably cease to exist in the next twenty years.  The number of dark companies is falling off the map quickly.  Most of these companies have older execs who will end up selling to a private company.  This will leave the small caps to the over hyped crap companies.  Then at the mid and top tier you have all of the growth companies who's growth is slowing where the Founder or VC wants to exit, gain liquidity and dump their shares on the public market. 

 

If we fast forward I think what we're going to be left with is a market of mid to larger companies whose best growth is far behind them.  It's really hard to get excited about investing in a market like that.  Maybe investors will leave quickly and there will be bargains?  I don't know.  I could also see a scenario where a number of companies continue to go private and the market becomes a shadow of itself as well.

 

Classic post! I absolutely agree with everything you posted. I have been observing this shift as well. Here is my observation:

 

1.) Any rich person that can write numerous 50k checks is a angel investor. These guys are usually former employees of a ipoed company or some old dude that can't get yield like the good old days.

 

2.)  The VC market is completely saturated due to the amazingly low price of starting a new company. The VC's are just matching the demand of startups. Just think of VC's as "idea funders".  This could accelerate or crash its just supply/demand.

 

3.)  Back in the day there was no such thing as an angel investor this was called your friends and family. There was a reason to ipo and be public. Being a public company is just a financing tool.  Look at walmart, home depot, and fastneal these were small startups.  These companies now would not have gone public in this environment and the public players like us would have missed the growth curve of these companies.

 

4.)  Angelist has changed the game.  The shift happened when the jobs act of 2013 passed. Think of angelist like the otc market for private companies.

 

5.) Conclusion= The private players will ipo once there unicorn has scaled or is close to being scaled. The public players lose all those years of growth. The small startups say non tech will be held by traditional private equity until again they think it has scaled. What does this all mean? I don't know. But there is a shift and its a shift that most public market players are underestimating. No more home depot ipo with like 10 stores. No more walmart ipo with i think 30ish stores. No more fastneal ipo with i think 11 stores.  The private players are catching all the growth and leaving us with a scaled up ham sandwich.

 

  Maybe this ham sandwich can scale or be eaten( linkedin) until the next scaled up ham sandwich appears. All i know is the private guys are catching the growth curve and selling us unicorns. And funding more companies in a power law way and selling us more unicorns. This cycle can repeat and repeat. I miss the days when the public guys could have funded a little baby unicorn.

 

Link to comment
Share on other sites

Merkhet, even with market cap inflation 25B is pushing it. You are still talking about AAPL equivalent - a company that pretty much takes over a huge huge area. So FIT - maybe if they dominate on-person-health-monitoring-and-care. IBKR - probably not.

 

Of course, as I said, you can lower your expectations to perhaps 18% growth, perhaps 10-15 years, then more companies would qualify.

 

Oddball, I think I am more optimistic. One possibility is spinoffs. CMG and PNRA were spinoffs. So something like that. That's why Liberties and their pieces could be attractive maybe. But, yeah, I agree that the private-forever could be issue for investors. We'll see.

 

Sure, but I was only talking about correctly defining the upper bound.

 

My main point was to not think along the following lines -- "A $2 billion company compounding at 20% for 20 years means that it'll be a $76 billion company. How many $76 billion companies are there today and how likely is this to happen?"

 

The correct inquiry is probably to ask how many $38 billion companies there are rather than $76 billion companies because a 2016 $38 billion company is the functional equivalent of a 2036 $76 billion company.

Link to comment
Share on other sites

3.)  Back in the day there was no such thing as an angel investor this was called your friends and family. There was a reason to ipo and be public. Being a public company is just a financing tool.  Look at walmart, home depot, and fastneal these were small startups.  These companies now would not have gone public in this environment and the public players like us would have missed the growth curve of these companies.

 

I partially disagree with this. I think what you say is true for tech companies. But if you tried to start a new Walmart, Home Depot, Fastenal, I doubt that you'd get easy VC funding. Do you have any examples of non-tech space companies: retailers, restaurants, distributors, non-tech household items manufacturers, etc. who would easily get to unicorn without going public? I'm not talking about online-only retailers like Jet.

Link to comment
Share on other sites

3.)  Back in the day there was no such thing as an angel investor this was called your friends and family. There was a reason to ipo and be public. Being a public company is just a financing tool.  Look at walmart, home depot, and fastneal these were small startups.  These companies now would not have gone public in this environment and the public players like us would have missed the growth curve of these companies.

 

I partially disagree with this. I think what you say is true for tech companies. But if you tried to start a new Walmart, Home Depot, Fastenal, I doubt that you'd get easy VC funding. Do you have any examples of non-tech space companies: retailers, restaurants, distributors, non-tech household items manufacturers, etc. who would easily get to unicorn without going public? I'm not talking about online-only retailers like Jet.

 

Lets define unicorn. I would say any company valued over one billion.  Thinking out loud and not doing any dd you are right.  That said, the only recent one that comes to mind is David tea's that was seeded by a family member and ipoed i believe in the 400 million range. I might do research on this because you bring up a great point.

Link to comment
Share on other sites

3.)  Back in the day there was no such thing as an angel investor this was called your friends and family. There was a reason to ipo and be public. Being a public company is just a financing tool.  Look at walmart, home depot, and fastneal these were small startups.  These companies now would not have gone public in this environment and the public players like us would have missed the growth curve of these companies.

 

I partially disagree with this. I think what you say is true for tech companies. But if you tried to start a new Walmart, Home Depot, Fastenal, I doubt that you'd get easy VC funding. Do you have any examples of non-tech space companies: retailers, restaurants, distributors, non-tech household items manufacturers, etc. who would easily get to unicorn without going public? I'm not talking about online-only retailers like Jet.

 

I have a friend who works for a VC fund in Pittsburgh here.  They have an entire fund devoted to non-tech companies.  They're "hard" companies in the sense they have real products, stores, locations etc.  This is one of the most promising areas for them, there are a LOT of ideas and not enough funding.

 

I agree with premfan, growth has been sucked up by angels and VC's.  The public markets have done it to themselves.  The regulation and burdens on companies are too costly for smaller startup companies.  Additionally we have a shadow market of funding that has come in to fill the gap.  When I met with a funding lawyer I asked him about the mechanics of the transaction.  He said I send an investor a prospectus, and they wire me money, that was it, nothing more, nothing less.  All I had to pay for was the prospectus so that I was legally protected.  It was cheap and simple, almost too simple.  A few paper forms and I could raise as much money as people would give me.  In theory this is what IPO's used to be.  Now an IPO is extremely expensive, and even staying legal as a public company is very expensive.  Too expensive for many of the small names I like to follow.

Link to comment
Share on other sites

Went through my portfolio and some lists from CoBF and elsewhere. Below 10B companies that could possibly be high compounders : CNSWF, FRMO, KHTRF, CLKFF, JLL, SEDG, NOV, PSHZF, URBN, IPGP, CFX, OTCM, EPIQ, EAT, MSM, CSVI, DCI, LNN, CRWS, CLC, CHE, HEI, NDSN, HCSG, LANC, VAL. I'm skeptical that they will be, mostly because of too low growth, but just throwing out some names. :) Sorry if majority of names are already known and discussed in various places before. :) Omitted Liberties-related cos.

 

DTEA is also possibility. I think CMG, PNRA examples show that retail-related concepts that catch up can be a huge compounders through years. The problem might be concepts that don't catch up... ;)

 

Have fun.

Link to comment
Share on other sites

Went through my portfolio and some lists from CoBF and elsewhere. Below 10B companies that could possibly be high compounders : CNSWF, FRMO, KHTRF, CLKFF, JLL, SEDG, NOV, PSHZF, URBN, IPGP, CFX, OTCM, EPIQ, EAT, MSM, CSVI, DCI, LNN, CRWS, CLC, CHE, HEI, NDSN, HCSG, LANC, VAL. I'm skeptical that they will be, mostly because of too low growth, but just throwing out some names. :) Sorry if majority of names are already known and discussed in various places before. :) Omitted Liberties-related cos.

 

DTEA is also possibility. I think CMG, PNRA examples show that retail-related concepts that catch up can be a huge compounders through years. The problem might be concepts that don't catch up... ;)

 

Have fun.

 

No PDER ("according to them" internal ROIC of 18% iirc) and ALS.TO?

 

Thanks for the list anyway. I am familiar with quite a few of them.

Link to comment
Share on other sites

 

Anything that looks like a good compounder today is incredibly expensive.  30x, 50x, or 1000x for AMZN.  It would be nice to find the next WBA, BDX, CHD, XOM or MO but it's nearly impossible to do in practice.

 

But if you guys come across any cool compounding machines that isn't Amazon, let me know.  Out of the thousands of threads on this board, I'm not aware of any others that look like real high ROIIC compounders.

 

For at least the last decade, Old Dominion Freight Lines has earned ~30% pre-tax returns on incremental invested capital, while reinvesting nearly all of its earnings.  It has been able to achieve those returns because it is well-managed and operates in an industry with significant local economies of scale (route density).  It's currently trading at 16x earnings, but you'll have to determine whether trailing earnings represent a cyclical peak. 

 

Whether the next decade will be as good as the last one likely depends on whether it can continue to take market share.  In addition, run-rate margins are beginning to approach incremental margins, so investors cannot expect to enjoy the same benefits from operating leverage as they did during the last decade.   

Link to comment
Share on other sites

 

Anything that looks like a good compounder today is incredibly expensive.  30x, 50x, or 1000x for AMZN.  It would be nice to find the next WBA, BDX, CHD, XOM or MO but it's nearly impossible to do in practice.

 

But if you guys come across any cool compounding machines that isn't Amazon, let me know.  Out of the thousands of threads on this board, I'm not aware of any others that look like real high ROIIC compounders.

 

For at least the last decade, Old Dominion Freight Lines has earned ~30% pre-tax returns on incremental invested capital, while reinvesting nearly all of its earnings.  It has been able to achieve those returns because it is well-managed and operates in an industry with significant local economies of scale (route density).  It's currently trading at 16x earnings, but you'll have to determine whether trailing earnings represent a cyclical peak. 

 

Whether the next decade will be as good as the last one likely depends on whether it can continue to take market share.  In addition, run-rate margins are beginning to approach incremental margins, so investors cannot expect to enjoy the same benefits from operating leverage as they did during the last decade. 

 

Very interesting, thanks. 

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...