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Compounder ideas please


petec
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I know there have been a number of similar threads over the years, but...

 

I'm looking for stocks with a decent chance of compounding at 15% for the next 10 years. I don't care about size or industry, but they need to have a big addressable market, a competitive edge, outstanding management, and compelling economics. They also need to be reasonably priced, but I'm not looking for deep value.

 

BAM and MSFT meet these criteria in my view and I am looking for two or three more ideas. If you have one please give the name and a sentence (or more) on why.

 

Many thanks

 

Pete

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MSFT is going to compound at 15%?

 

That is highly, highly doubtful. It has over a trillion dollar market cap.  Is it possible? Sure. Is it likely? Hardly.

 

BAM has a better chance but that has barely done it over the past 10 years at 16% (I believe that includes dividend and a long bull market) and at 12.24% over 15 years.

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I agree with the sentiment that finding compounders that will compound 15%+ for next 10 years after 10 years of bull market and multiple expansion is not going to be simple.

 

If you are saying MSFT, then why not GOOG and FB? AAPL if they manage to produce attractive huge market services/products. Maybe TWTR.

 

BKNG/EXPE

 

IAC and its parts (MTCH, ANGI).

 

KKR

 

Exor

 

Naspers (  NPSNY / PROSY )

 

ICE

 

V/MA

 

IPGP (going a bit on limb here).

 

STNE

 

NVDA

 

Disclosure: I own most of the above.

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If you are saying MSFT, then why not GOOG and FB? AAPL if they manage to produce attractive huge market services/products. Maybe TWTR.

 

 

The simple answer is: because I know MSFT far better. Not including the others doesn't mean I don't think they will do well, although they are very different businesses and I don't think one can assume that if one does well the others will too.

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So  let's say MSFT grows at 15% for 10 years. Pretty good, for sure. Just quick math puts that at over $4.6 trillion (you can cut a percent or so off for dividends) but still! The entire us stock market is around $34 trillion I believe. If it grows at 8% we're looking at $68 trillion (roughly) after 10 years. So MSFT is going to be almost 7% of the entire US market cap.

 

Does anyone know what has historically happened to companies that have reached 7% of the total market?

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Jurgis' list is very good.

 

I'm also assuming your capital is not in the billions so there are some smaller companies here that could easily be a 4x over 10 years given their size relative to their markets.

 

FTV - Lean-based business system with acquisitions

 

ROP = Software roll-up

 

FSV - HOA administrator roll-up

 

EVI - Commercial laundry roll-up

 

AMOT - Motion control roll-up with experienced operator

 

FB - Social media company nobody's ever heard of

 

PINS - Social media Idea company mostly women use and women never buy anything so where's the value in that

 

STNE - South American payments

 

TRRSF/TSU - Fronting insurer similar to State National

 

FRFHF/FFH - Canadian insurer nobody's ever heard of

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FRFHF/FFH - Canadian insurer nobody's ever heard of

 

Part of me sincerely wishes I hadn't.

 

Lots of interesting names here - thanks. The only one I won't bother looking at is Stone. I know how competitive that market is and I know I won't get comfortable with the valuation as a result.

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So  let's say MSFT grows at 15% for 10 years. Pretty good, for sure. Just quick math puts that at over $4.6 trillion (you can cut a percent or so off for dividends) but still! The entire us stock market is around $34 trillion I believe. If it grows at 8% we're looking at $68 trillion (roughly) after 10 years. So MSFT is going to be almost 7% of the entire US market cap.

 

Does anyone know what has historically happened to companies that have reached 7% of the total market?

 

This thread isn't really about MSFT but FWIW I think the company is taking share in several large, growing addressable markets, which drives revenue. It's capable of significant operating leverage which obviously helps earnings grow faster than revenue. It converts 100% of earnings into FCF so it doesn't need to grow at 15% to compound at 15% (more like 11%, which is still impressive but has a huge impact on compound maths). I think it is deepening its moats, which reduces one key risk - competition. And it's arguably less exposed to the other big risk - regulation - than the other tech megacaps. The future is inherently unknowable so I have no issue admitting I might be wrong, but I am not put off by the fact that it has a $1tn market cap any more than I was put off by the fact that it had a $500bn market cap 2 years ago.

 

Would you mind answering the question as to whether MO can grow fast enough to compound at 15%? I don't know the stock well.

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So  let's say MSFT grows at 15% for 10 years. Pretty good, for sure. Just quick math puts that at over $4.6 trillion (you can cut a percent or so off for dividends) but still! The entire us stock market is around $34 trillion I believe. If it grows at 8% we're looking at $68 trillion (roughly) after 10 years. So MSFT is going to be almost 7% of the entire US market cap.

 

Does anyone know what has historically happened to companies that have reached 7% of the total market?

 

This thread isn't really about MSFT but FWIW I think the company is taking share in several large, growing addressable markets, which drives revenue. It's capable of significant operating leverage which obviously helps earnings grow faster than revenue. It converts 100% of earnings into FCF so it doesn't need to grow at 15% to compound at 15% (more like 11%, which is still impressive but has a huge impact on compound maths). I think it is deepening its moats, which reduces one key risk - competition. And it's arguably less exposed to the other big risk - regulation - than the other tech megacaps. The future is inherently unknowable so I have no issue admitting I might be wrong, but I am not put off by the fact that it has a $1tn market cap any more than I was put off by the fact that it had a $500bn market cap 2 years ago.

 

Would you mind answering the question as to whether MO can grow fast enough to compound at 15%? I don't know the stock well.

 

I didn't mention MO. I don't really have any idea what might compound at 15% over a long period of time.

 

But I do know that trees don't grow to the sky.  ;)

 

But hey, I sold MSFT too early so what do I know!

 

 

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You're asking a difficult question.

 

Start by narrowing it down:

What companies will be around in 10 years?

Then figure out which markets have room to grow for 10 years.

 

Forget the 15% number, if you can get those 2 points correct, the rest will take care of itself.

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Calumet - Deleveraging specialty chemicals business with short term catalyst to sell fuel refinery and get back to specialty chemical business.  $237mm of market cap and $1.2bn of net debt. Debt paydown is about $100mm a year. Overall firm EBITDA is about $300mm.  Selling fuel refinery will likely get net debt down to about $600-650mm by year end 2020.  MLP structure.  Nobody wants any of that.  Specialty chemical business is quite good.  Stable recurring business.  Levered FCF yield is something like 35%.  This is a MLP structure and you will get a K-1.  No natural shareholder base.  If you go out 4-5 years and if they did nothing but pay down debt, you are likely buying the business at 2x earnings of a pretty good specialty chem business in a MLP structure.  This name is hated as they are paying for the sins of their past.  This isn't a traditional compounder, the 15% 10 year upside comes from a levered situation and the 1.5-2x P/FCF looking 4-5 years out when the right price is likely 15x P/FCF.       

 

HHC - Won't go into the details. But it's cheap. 

 

Ashtead - Network density play.  Look at the historical track record.  It's a duopoly between Sunbelt and United Rental (20%) versus lots of mom and pops.  Only 12x P/FCF.  Growing EPS 15-

20% every year through organic and acquisitions.  They will take share from mom and pop.  Rentals vs buys is experiencing structural improvements.  Con is that it's volatile and no one wants to own something that is economic sensitive at the tail end of a cycle.  UK listed but 9% of business in US.  They have better software than the mom and pops.  They can send salesman into a job with a iPad app and close deals and customer can use apps to request for service.  They have 20-30 locations in a geographic area so they are more likely to have the equipment in stock when a customer want it.  Scale gives them purchasing power.  I estimate that it is at least 30% cheaper than what a customer can buy at.  They are really outsourced equipment leasing for their customers.  Contractors don't want their employees using ladders taller than 6 feet.  Contractors want someone else keeping good records in case there is a fire etc.  At scale they can service and maintain the equipment better.  They also act as a logistic arm for contractors.  If you buy your own equipment, you have to store it somewhere and allocate an employee to tracking it and moving it around.  It's a growing EaaS company (Equipment as a Service) company trading at an unassuming low teens P/FCF.  The EaaS comment is a bit tongue in cheek. 

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I agree with the sentiment that finding compounders that will compound 15%+ for next 10 years after 10 years of bull market and multiple expansion is not going to be simple.

 

If you are saying MSFT, then why not GOOG and FB? AAPL if they manage to produce attractive huge market services/products. Maybe TWTR.

 

BKNG/EXPE

 

IAC and its parts (MTCH, ANGI).

 

KKR

 

Exor

 

Naspers (  NPSNY / PROSY )

 

ICE

 

V/MA

 

IPGP (going a bit on limb here).

 

STNE

 

NVDA

 

Disclosure: I own most of the above.

 

I am intrigued to see BKNG  EXPdia - the online travel agency is a very competitive business -!

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You're asking a difficult question.

 

Start by narrowing it down:

What companies will be around in 10 years?

Then figure out which markets have room to grow for 10 years.

 

Forget the 15% number, if you can get those 2 points correct, the rest will take care of itself.

 

Aren't most of the S&P 500 going to be around?  I bet that 50% of them will still be in the index.  On average, there is a 4.4% change to the index each year according to this article

https://www.businessinsider.com/sp-500-index-constituent-turnover-2015-6

 

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here's a fun contrarian one (I don't own).

 

Softbank.

 

It trades for a 60% discount to NAV. Let's say in 10 years sentiment changes and it trades for a mere 25% discount or even (gasp!) a 0% discount.

 

This would add 600-950 bps of return/year from discount narrowing.

 

So can Softbank grow its value by 6-9% from here?

 

Many would shudder and say "it will decline in value from here, not grow".

 

Well, let's see about that:

 

47% of assets are in the largest Chinese e-commerce company, growing revenue 30% across a variety of inititatives (core e-comm, cloud, payments, etc).

20% of assets is a large japanese telecom (myeh)

13-14% ish each in leveraged exposure to the Vision Fund (whoa nelly!), ARM, and Sprint

 

then those in themselves are levered. with 17% holdco level debt.

 

While certainly not without risk, I think it's important to consider the upside tail. Softbank is only an $80 billion company. Its stake in AliBaba alone is worth $125 billion. Many credible market participants think Alibaba is cheap and has a very long runway (some also think anything from china is automatically not to be trusted).

 

You can do similar, less extreme math with Prosus / NAspers as more pure plays on Tencent.

 

 

 

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But I do know that trees don't grow to the sky.  ;)

 

True, but here's another way to think about it. Given the FCF, and the operating leverage, Microsoft could probably deliver a total return of 15% with revenue growth of 8-9%. But let's call it 10%. That means revenue of $325bn in 10 years. If global GDP grows at 3% in dollars, or about 1% real, which would not be a great result, then MSFT revenues will need to be about 0.28% of global GDP.

 

It has already reached 0.15%. Perhaps there is some unbreachable ceiling between 0.15% and 0.28% but the fact that MSFT is currently growing revenues at 15% suggests it is not close to it.

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You're asking a difficult question.

 

Start by narrowing it down:

What companies will be around in 10 years?

Then figure out which markets have room to grow for 10 years.

 

Forget the 15% number, if you can get those 2 points correct, the rest will take care of itself.

 

Aren't most of the S&P 500 going to be around?  I bet that 50% of them will still be in the index.  On average, there is a 4.4% change to the index each year according to this article

https://www.businessinsider.com/sp-500-index-constituent-turnover-2015-6

 

And they don't just have to be around - they have to maintain their economics, which is hard to do in a growing market because growing markets attract capital. Longevity and market growth are necessary, but not sufficient.

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But I do know that trees don't grow to the sky.  ;)

 

True, but here's another way to think about it. Given the FCF, and the operating leverage, Microsoft could probably deliver a total return of 15% with revenue growth of 8-9%. But let's call it 10%. That means revenue of $325bn in 10 years. If global GDP grows at 3% in dollars, or about 1% real, which would not be a great result, then MSFT revenues will need to be about 0.28% of global GDP.

 

It has already reached 0.15%. Perhaps there is some unbreachable ceiling between 0.15% and 0.28% but the fact that MSFT is currently growing revenues at 15% suggests it is not close to it.

 

Yes, however when companies get too big and too powerful, people tend to get angry. A good exercise would be to see what other companies have had a large % of total market cap and see how they did once they go to the 7% or so threshold. I don't know the answer to that but it would be interesting. I would imagine Standard Oil hit that mark. Maybe GM at one time?

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But I do know that trees don't grow to the sky.  ;)

 

True, but here's another way to think about it. Given the FCF, and the operating leverage, Microsoft could probably deliver a total return of 15% with revenue growth of 8-9%. But let's call it 10%. That means revenue of $325bn in 10 years. If global GDP grows at 3% in dollars, or about 1% real, which would not be a great result, then MSFT revenues will need to be about 0.28% of global GDP.

 

It has already reached 0.15%. Perhaps there is some unbreachable ceiling between 0.15% and 0.28% but the fact that MSFT is currently growing revenues at 15% suggests it is not close to it.

 

Yes, however when companies get too big and too powerful, people tend to get angry. A good exercise would be to see what other companies have had a large % of total market cap and see how they did once they go to the 7% or so threshold. I don't know the answer to that but it would be interesting. I would imagine Standard Oil hit that mark. Maybe GM at one time?

 

Hence my point about regulation. I take some comfort in the fact that Microsoft is primarily a business-facing enterprise, not consumer-facing, and I can find no evidence that it has abused its pricing power over the years. In fact what it has done is make its products better and better.

 

Whether being 7% of the S&P is a relevant thing I have no idea. MSFT is already 4.4%. What's the threshold for concern? And I can think of companies that have remained 7% of their local indices for years (Itau, for example) without ever having issues. Plus, it's a global company, and it won't be be anything like 7% of global market cap.

 

Standard Oil wasn't listed, and the issue was that it had a virtual monopoly. If Microsoft didn't have competition I would worry but it clearly does in every product.

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here's a fun contrarian one (I don't own).

 

Softbank.

 

It trades for a 60% discount to NAV. Let's say in 10 years sentiment changes and it trades for a mere 25% discount or even (gasp!) a 0% discount.

 

This would add 600-950 bps of return/year from discount narrowing.

 

So can Softbank grow its value by 6-9% from here?

 

Many would shudder and say "it will decline in value from here, not grow".

 

Well, let's see about that:

 

47% of assets are in the largest Chinese e-commerce company, growing revenue 30% across a variety of inititatives (core e-comm, cloud, payments, etc).

20% of assets is a large japanese telecom (myeh)

13-14% ish each in leveraged exposure to the Vision Fund (whoa nelly!), ARM, and Sprint

 

then those in themselves are levered. with 17% holdco level debt.

 

While certainly not without risk, I think it's important to consider the upside tail. Softbank is only an $80 billion company. Its stake in AliBaba alone is worth $125 billion. Many credible market participants think Alibaba is cheap and has a very long runway (some also think anything from china is automatically not to be trusted).

 

You can do similar, less extreme math with Prosus / NAspers as more pure plays on Tencent.

 

I think that's a nice summary of Softbank, and yeah it might fit the bill.

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