How I Pick Winners
In 2005 I opened my first brokerage account. I was 18 and just started my studies at the University of Waterloo. I invested in 5 stocks. I didn't really know what the heck I was doing but I knew I needed skin in the game to learn the ropes. Here's what happened with my portfolio within the first year: three stocks traded around the same range. One stock got bought out. And the other stock was a high flyer. I got lucky that first year... The following years had their ups and downs; winners and losers. But it wasn't until I had invested in the market for 10 years that I truly felt confident in my stock-picking abilities. Still, not every stock I pick is a winner. That's impossible. Though what I learned was that cutting my losses and re-allocating that capital into winners made up for those losses and then some over time.
Today, I tend to invest in these three buckets:
For example, I started loading up on Starbucks stock in 2008 at around $15/share, at a time when Starbucks was oversaturating themselves in the market, with most "experts" doubting their strategy of selling high-priced coffee, especially with the financial crisis looming, and new entrants in the coffee business, such as McDonalds. However, when I bought Starbucks stock, after their huge decline on the market, I never witnessed a drop in traffic among the stores nearby me. Starbucks had huge competitive advantage then and now. I thought, "If Starbucks goes out of business, that's probably when the world will end". And, seriously, do you think business people would ever switch their coffee meetings from Starbucks to McDonalds?
- Mispriced Large Caps
- Speculative Takeovers
- Small/Mid-Cap Capital Compounders
I also dabble in speculative takeovers. When Lowe's first bid for Rona fell through, I bought a stake in Rona, and just sat on the position. I speculated that Lowe's, or another company (maybe Home Depot), would eventually scoop up Rona, with the Quebec Government's approval of course. When Lowe's came back years later, bid on Rona a second time, and won approval to buy them out, my Rona shares shot up ~100% in one day. Well worth the wait.
But the most successful 'bucket' in my portfolio is the Small/Mid-Cap Capital Compounders. Why? I find that as long as the intrinsic value of these businesses grow every year, so does the price of the stock. I'm actually upset when one of my 'capital compounder' stocks get bought out, because most of the time there's so much more potential for growth. It forces me to go out hunting for an equally remarkable capital compounder to replace the buy-outs.
Here's the characteristics, in my opinion, of these 'capital compounder' stocks:
I analyze these characteristics in a company over a period of time - at least 5 years - as some companies can post great records only to then fizzle out. That's why competitive advantage is so important. My favourite sector by the way: consumer franchises.
- Growth in Revenue
- High Return on Equity (ROE) / Return on Capital (ROIC)
- I like to see >= 20% ROE and >= 10% ROIC
- Growth in Free Cash Flow Per Share
- Growth in Book Value Per Share
- Growth in Earnings Per Share
Take a look at the screenshots below for an example of a company that exhibits these 'capital compounder' characteristics:
The successful 'capital compounders' that I invest in use their free cash flow to grow their businesses, both organically and through accretive acquisitions that fit well into their business model. I want to stress, though, that picking stocks is not easy. There's always inherent risk.
I interviewed top investors in my book, Market Masters. Some invested primarily in strong capital compounder companies. However, there's a gentleman named François Rochon of Giverny Capital, located in Quebec, who doesn't appear in my book (maybe the sequel...) but has been very successful investing in these types of companies through many business cycles. I want to bring him to your attention now. Since inception, Mr. Rochon's "Rochon Global Portfolio" has delivered a 16.3% compound annual return. You can dig into his returns here and learn more about his investment strategy here.
I hope you enjoyed this newsletter. If you want to chat, email me at firstname.lastname@example.org. As always, happy investing.
Robin Speziale is the National Bestselling author of Market Masters: Interviews with Canada's Top Investors. He lives in Toronto, Canada. Get a copy of his latest book. Click Here: MarketMastersBook.com
[Robin Speziale is not a registered advisor. This newsletter does not contain financial advice or stock reccomendations. Please conduct your own research and consult a professional.]