Compounder ideas please

[petec]

Thanks everyone - lots of work for me here :)

 

I broadly agree with the EM-biased comments. Itau for example has a good chance of compounding at 15% from here. But there are some good ideas from North America too.

 

The distinction between those recommending high-multiple, high-growth stocks, and those recommending names that are more out of favour, is interesting. I am generally not well suited psychologically to holding high multiple stocks, although it can sometimes work for me*. As a result I tend to outsource out-and-out growth investing to managers who are good at it (Scottish Mortgage is probably the standout example in the UK) and I am more drawn to compounders like PDH and contrarian ideas like Softbank. That said, I'll take at least a quick look at everything on here.

 

*My MSFT position was started in 2010 when it traded on 7x EV/FCF and everyone I spoke to thought Apple would kill Windows and Google would kill Office and the cloud would kill both. It's clearly rerated, but not to crazy levels, and my confidence in the underlying business is higher than ever. I'd obviously love to find another investment like that but they are scarce in this market, and until I do I see no reason to recycle the capital.

 

Keep 'em coming.

[james22]

1. At the end of a long bull market, 15% seems unlikely.

 

2. Some factor (SV), international (EM), sector, or strategy funds might have expected returns (if you believe in mean reversion) close enough to 15% that leverage could get you there?

 

(Margin risk offsetting the uncompensated individual stock risk?)

 

3. Best bet might be cash and hoping for a chance for something obvious later?

[Spekulatius]

Thanks everyone - lots of work for me here :)

 

I broadly agree with the EM-biased comments. Itau for example has a good chance of compounding at 15% from here. But there are some good ideas from North America too.

 

The distinction between those recommending high-multiple, high-growth stocks, and those recommending names that are more out of favour, is interesting. I am generally not well suited psychologically to holding high multiple stocks, although it can sometimes work for me*. As a result I tend to outsource out-and-out growth investing to managers who are good at it (Scottish Mortgage is probably the standout example in the UK) and I am more drawn to compounders like PDH and contrarian ideas like Softbank. That said, I'll take at least a quick look at everything on here.

 

*My MSFT position was started in 2010 when it traded on 7x EV/FCF and everyone I spoke to thought Apple would kill Windows and Google would kill Office and the cloud would kill both. It's clearly rerated, but not to crazy levels, and my confidence in the underlying business is higher than ever. I'd obviously love to find another investment like that but they are scarce in this market, and until I do I see no reason to recycle the capital.

 

Keep 'em coming.

 

I wouldn’t call something where a significant part of the return comes from closing the gap to intrinsic value a compounder though. A compounder for me is a stock that grows intrinsic value at a high and fairly consistent rate.

In order to do so, they will need to earn high returns on capital, Because over the long run, the returns from you stock investment should about equal the returns of invested capital of the business you are invested in.

 

I doubt that a bank  (ITAU) in a volatile economy like a Brazil can be a compounder in that sense. Actually most companies in EM won’t work either, because their ROIC isn’t high enough, despite being located in high growth countries.

[vinod1]

I agree with Spekulatius. A compounder is a business that grows its IV at a very attractive rate for a long time into the future.

 

There are a lot of good ideas mentioned and they are going to compound IV at very high rates. But the issue is always going to be forward returns from the current prices.

 

I have been selling a bunch of compounders whose returns have now been driven into the low single digit range. Moody's, S&P Global and MSCI, all in this bucket had their stock prices increase a whole lot more than the business values over the last 18 months. Many other compounders have also behaved similarly but atleast the forward returns are still in the acceptable range for now so holding on.

 

Vinod

 

 

 

 

[petec]

I also agree re compounders and wasn’t looking for rerating candidates when I started the thread-but if someone suggests an interesting one who am I to argue? ;)

 

Volatility notwithstanding, Itau has an ROE over 20% in an economy with inflation in the low single digits and a raft of disinflationary reforms happening to keep it there. It has a 10% earnings yield and can pay out half of that while growing at 10% or more sustainably. The economy is accelerating out of the worst recession in its history and the state banks are shrinking so the growth pathway for the private banks is clear. It might be quite difficult for Itau *not* to compound at 15%! And the currency is cheap so the opportunity in dollars is arguably even better. You’re right the volatility may create difficulties at times but it also means the stock is cheap.

[thepupil]

Thanks everyone - lots of work for me here :)

 

I broadly agree with the EM-biased comments. Itau for example has a good chance of compounding at 15% from here. But there are some good ideas from North America too.

 

The distinction between those recommending high-multiple, high-growth stocks, and those recommending names that are more out of favour, is interesting. I am generally not well suited psychologically to holding high multiple stocks, although it can sometimes work for me*. As a result I tend to outsource out-and-out growth investing to managers who are good at it (Scottish Mortgage is probably the standout example in the UK) and I am more drawn to compounders like PDH and contrarian ideas like Softbank. That said, I'll take at least a quick look at everything on here.

 

*My MSFT position was started in 2010 when it traded on 7x EV/FCF and everyone I spoke to thought Apple would kill Windows and Google would kill Office and the cloud would kill both. It's clearly rerated, but not to crazy levels, and my confidence in the underlying business is higher than ever. I'd obviously love to find another investment like that but they are scarce in this market, and until I do I see no reason to recycle the capital.

 

Keep 'em coming.

 

I wouldn’t call something where a significant part of the return comes from closing the gap to intrinsic value a compounder though. A compounder for me is a stock that grows intrinsic value at a high and fairly consistent rate.

In order to do so, they will need to earn high returns on capital, Because over the long run, the returns from you stock investment should about equal the returns of invested capital of the business you are invested in.

 

I doubt that a bank  (ITAU) in a volatile economy like a Brazil can be a compounder in that sense. Actually most companies in EM won’t work either, because their ROIC isn’t high enough, despite being located in high growth countries.

 

I respectfully disagree that EM banks (and EM companies in general) can't be "compounders". EM Banks are some of the most sought after franchises in the world. it's a slow day before thanksgiving so just giving the old Bloomberg a spin, based on some random cherry picked EM banks. 

 

Itau has returned 16% / year since 1994 (in USD), 6% over the past 10, 8% over the past 5, 11.5% over the past one. It made a 15% ROE in 2008 (that's the trough), was in the 30's in the early 2000's, and has averaged 18-20% over the past 5 years.

 

Credicorp has returned 13.6% / year since 1997 (in USD), 14.5% over the past 10, 9% over the past 5, -1% over the past year. It had a low ROE in the early 2000's (2-6%) but has averaged mid to high teens in every year since.

 

HDFC Bank has returned 23.3% / year since 1995  (in USD), 18.3% over the past 10, 19% over the past 5, 35% over the past 1. Its ROE has consistently been in the high teens to 20%. there's a reason it trades at 4.5x book!!!

 

BDO Bank in the Phillipines has returned 14.7% since 2002 (in USD), 18.6% over the past 10, 9% over the past 5. it has a more pedestrian historical ROE in the low double digits.

 

Bank Mandiri in Indonesia has made 20% a year since 2003 (in USD), 10% over the past 10, 5.6% over the past 5. high historical ROE's

 

Now we get a little crazy

 

Guaranty Trust Bank in Nigeria has made 22.1% / year (in USD) since 2002, 8% in the past 10, -7.4% / year in the past 5. It made a 13% ROE in 2009, otherwise 20-30's. It trades for 4.5x and a 10% divvy yield plus the currency has sucked, so the last few yhears have been very bad.

 

Sberbank has made a 16% annualized return since 1998 (in USD), 8% in the past 10, 24% / year in the past 5. Its ROE dropped to 3% in 2009 and 10% in 2015, otherwise low 20's for 2+ decades.

 

There are examples in those where one could point to "see they went through tough times so it's not a consistent compounder", but they also have been through massive economic turmoil without catastrophic dilution and long term returns for all of them are very high. Not saying the future will be like the past, just saying that there are examples of companies who TVBVPS, dividends, and ROE's have shown consistent growth/resiliency/etc. in EM banks.

 

 

 

 

 

 

 

 

 

[petec]

Not to mention our very own (well, Fairfax’s) Commercial International Bank of Egypt which has done 14.9%, plus dividend, in dollars, over the last 15 years.

 

Quite tempted by a basket of these!!

[Spekulatius]

^ Thanks for above comments regarding EM banks. I guess I was just biased based on the performance since the GFC in 2008. I have owned EM banks before, made some dough in BAP ( Chile) and one a stub in AVAL (well run Bolivian bank) and I am tracking ITUB too, but not invested currently.

 

I do agree, if they get the Brazilian economy going again, ITUB should be money good. It just seems to be that since 2008, they have used just about any opportunity to scoot themselves in the foot in addition to macro headwinds (waning commodity boom and meltdown of energy markets)

[ValueMaven]

Out of the Malone empire - what is your favorite Liberty compounder?  Trackers?  Spinoffs?

[LC]

Look at RSG and ECL... including dividends they have been solid steady growers (stock price + div) over 15% each year..

 

RSG is 2nd largest trash collection firm in US.

ECL does water maintenance, cleaning supplies globally.

 

Check out the Gates Foundation 13Fs.

 

Thoughts on RSG vs WM? RSG seems like slight better operators but WM has more scale.

[Broeb22]

Some more companies that might be good compounders with no or high PE’s

 

FTNT - tailwinds in the network security space, market growing nicely. Company is also taking share. Founder owned

 

EPAM - will grow 20% pa for some time to come. Founder owned

 

SPLK,ESTC - Growing end markets , will grow for some time to come. Founder owned

 

WDAY - Although HCM market maybe slowing , they are getting into enterprise financial management SAAS . It’s a huge market and growing. Aneel Bhusri and Dave duffield have done a great job so far and are conservative with guidance.

 

NOW - same as above , growing end market but valuations are high, even adjusting for growth and margins

 

TTD - They have customer. concentration risks but have long runway

 

SQ/SHOP and WIX to a lesser extent - Long runways

 

DG - Best of breed dollar store, will be around for a long time to come

 

gjangal, if you like EPAM check out DAVA. Smaller and arguably growing faster. 1H20 is going to be weird because Worldpay bought them out of their JV, but underlying growth should still be pretty good.

[gjangal]

Some more companies that might be good compounders with no or high PE’s

 

FTNT - tailwinds in the network security space, market growing nicely. Company is also taking share. Founder owned

 

EPAM - will grow 20% pa for some time to come. Founder owned

 

SPLK,ESTC - Growing end markets , will grow for some time to come. Founder owned

 

WDAY - Although HCM market maybe slowing , they are getting into enterprise financial management SAAS . It’s a huge market and growing. Aneel Bhusri and Dave duffield have done a great job so far and are conservative with guidance.

 

NOW - same as above , growing end market but valuations are high, even adjusting for growth and margins

 

TTD - They have customer. concentration risks but have long runway

 

SQ/SHOP and WIX to a lesser extent - Long runways

 

DG - Best of breed dollar store, will be around for a long time to come

 

gjangal, if you like EPAM check out DAVA. Smaller and arguably growing faster. 1H20 is going to be weird because Worldpay bought them out of their JV, but underlying growth should still be pretty good.

 

 

Broeb22, Thanks for idea, i ll check it out. What do you think they can grow in terms of CAGR after the buyout ?

[thowed]

Like the EM bank thoughts.

 

I'll add in BCA in Indonesia and Public Bank in Malaysia which I'm told are the two ASEAN banks with the highest corporate governance.  And if you want to go really off piste, there's Brac in Bangladesh, which seems to be a class operation, though not cheap from memory.

 

I REALLY like the EM reversion stuff - as a big EM fan, here's hoping - it's been a rough 5 years.

 

I don't know much about Ulta, but Retail is definitely getting interesting.  We all know it's being disrupted, but I believe that retail isn't dead, it's just being transformed.  There are going to be a lot of value traps out there, but if you can work out who can adapt their retail format to the future, there's a chance of picking it up for a song right now.

[petec]

Like the EM bank thoughts.

 

I'll add in BCA in Indonesia and Public Bank in Malaysia which I'm told are the two ASEAN banks with the highest corporate governance.  And if you want to go really off piste, there's Brac in Bangladesh, which seems to be a class operation, though not cheap from memory.

 

I REALLY like the EM reversion stuff - as a big EM fan, here's hoping - it's been a rough 5 years.

 

I don't know much about Ulta, but Retail is definitely getting interesting.  We all know it's being disrupted, but I believe that retail isn't dead, it's just being transformed.  There are going to be a lot of value traps out there, but if you can work out who can adapt their retail format to the future, there's a chance of picking it up for a song right now.

 

What are your best EM and retail ideas?

 

[petec]

And this is a little off-thread because these don't have a history of compounding and fit more into the value/rerating category, but Atlas Mara is about to take control of Union Bank of Nigeria, which should be a compounder, and is demonstrably cheap vs the listed assets it holds.

 

If you consider Greece an EM then Eurobank still has a long way to run too.

[Broeb22]

Some more companies that might be good compounders with no or high PE’s

 

FTNT - tailwinds in the network security space, market growing nicely. Company is also taking share. Founder owned

 

EPAM - will grow 20% pa for some time to come. Founder owned

 

SPLK,ESTC - Growing end markets , will grow for some time to come. Founder owned

 

WDAY - Although HCM market maybe slowing , they are getting into enterprise financial management SAAS . It’s a huge market and growing. Aneel Bhusri and Dave duffield have done a great job so far and are conservative with guidance.

 

NOW - same as above , growing end market but valuations are high, even adjusting for growth and margins

 

TTD - They have customer. concentration risks but have long runway

 

SQ/SHOP and WIX to a lesser extent - Long runways

 

DG - Best of breed dollar store, will be around for a long time to come

 

gjangal, if you like EPAM check out DAVA. Smaller and arguably growing faster. 1H20 is going to be weird because Worldpay bought them out of their JV, but underlying growth should still be pretty good.

 

 

Broeb22, Thanks for idea, i ll check it out. What do you think they can grow in terms of CAGR after the buyout ?

 

Probably on par with EPAM. If anything it’s likely to be a bit higher given they are a smaller size now than EPAM. I like their partnership with Bain where it seems like Bain is using them to perform some IT modernization activities at their portfolio companies as well as do some IT due diligence at potential targets.

[ValuePadawan]

And this is a little off-thread because these don't have a history of compounding and fit more into the value/rerating category, but Atlas Mara is about to take control of Union Bank of Nigeria, which should be a compounder, and is demonstrably cheap vs the listed assets it holds.

 

If you consider Greece an EM then Eurobank still has a long way to run too.

 

You also get 6.27% of Equity Group Holdings which operates in eastern and central Africa and 79.5% of BancABC Botswana. Just following demographic trends you get the mental models of population growth, plus increased banking penetration as a lower % of people have bank accounts than most developing countries, plus gdp per capita growth. If they can have competent sober management through Fairfax Africa they should be able to ride that wave for 50 years.

[petec]

And this is a little off-thread because these don't have a history of compounding and fit more into the value/rerating category, but Atlas Mara is about to take control of Union Bank of Nigeria, which should be a compounder, and is demonstrably cheap vs the listed assets it holds.

 

If you consider Greece an EM then Eurobank still has a long way to run too.

 

You also get 6.27% of Equity Group Holdings which operates in eastern and central Africa and 79.5% of BancABC Botswana. Just following demographic trends you get the mental models of population growth, plus increased banking penetration as a lower % of people have bank accounts than most developing countries, plus gdp per capita growth. If they can have competent sober management through Fairfax Africa they should be able to ride that wave for 50 years.

 

Indeed. Do you own it?

[thowed]

 

What are your best EM and retail ideas?

 

I'm more of a funds person to be honest.

 

But going back to the earlier idea of contrarianism, I was reminded of Russia recently.  Cheap and hated (if not quite as much as a couple of years ago).  I've never felt too comfortable with the governance.

 

While it's the 'one that everyone owns', I'd have thought that Sberbank would have a pretty decent chance of doing well over time.

 

If you want retail, then I suppose X5 would be one to look at.

 

At the more obvious end, I find FEET (Fundsmith EM IT) becoming gradually more interesting, whether for owning or inspiration.  The portfolio's been tightened up, and is full of super impressive EM consumer companies.  They've just been too crazily expensive I think, even for their impressive stats.  They seem to be slowly getting a bit cheaper.  I wouldn't expect them ever to be 'cheap' (except in a 2008 situation) as they're just too high quality and profitable, but if they become semi-reasonably priced, they should be no-brainers for the long-term.

[blainehodder]

80% $TQQQ, 20% $TMF and no really ugly bear markets. Could do 20%-25% CAGR.

[petec]

80% $TQQQ, 20% $TMF and no really ugly bear markets. Could do 20%-25% CAGR.

 

Less the rollover cost...!

[petec]

 

What are your best EM and retail ideas?

 

I'm more of a funds person to be honest.

 

But going back to the earlier idea of contrarianism, I was reminded of Russia recently.  Cheap and hated (if not quite as much as a couple of years ago).  I've never felt too comfortable with the governance.

 

While it's the 'one that everyone owns', I'd have thought that Sberbank would have a pretty decent chance of doing well over time.

 

If you want retail, then I suppose X5 would be one to look at.

 

At the more obvious end, I find FEET (Fundsmith EM IT) becoming gradually more interesting, whether for owning or inspiration.  The portfolio's been tightened up, and is full of super impressive EM consumer companies.  They've just been too crazily expensive I think, even for their impressive stats.  They seem to be slowly getting a bit cheaper.  I wouldn't expect them ever to be 'cheap' (except in a 2008 situation) as they're just too high quality and profitable, but if they become semi-reasonably priced, they should be no-brainers for the long-term.

 

Will revisit FEET, thanks.

 

I also discovered SEDY this week - emerging markets dividend ETF, but what it really opened my eyes to is some optically very cheap Russian companies. Tempted by a small position.

[sleepydragon]

 

I didn't mention MO.

 

 

Indeed not. Sorry!

 

I mentioned MO.

It’s a compounder because they almost need no capital to run the business and they have the ability to keep raising prices. The cigarettes prices in USA are still very affordable compared to other countries.

They have some debts but those debts were issued due to investments which could be sold.

Although Berkshire won’t invest in tobacco stocks, Buffett had said they are great businesses.

The stock is also ignored by institutions because it’s a sin stock.

 

[no_free_lunch]

I own MO but am already thinking of selling. I don't remember specifics but they made some really poor acquisitions which causes me to question management capital allocation. Didn't they invest in e cigarettes and marijuana at some really high multiples.  Great business not great management.

[sleepydragon]

I own MO but am already thinking of selling. I don't remember specifics but they made some really poor acquisitions which causes me to question management capital allocation. Didn't they invest in e cigarettes and marijuana at some really high multiples.  Great business not great management.

 

True. But I think the earlier PM/MO failed merger put them on the “play table”. Someone, maybe PM, will eventually buy MO and fire the management.

The current stock price is already pricing their investments in JULL to 0.