That’s why we’re very happy to do a Deep Dive on this amazing business.

Today’s it’s time to dive into Brookfield’s competitive advantage and industry.

Serious investors
I am looking for a few serious investors who want to step up their investment game in 2026.

Sounds interesting? Ap…

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Brookfield Corporation.

Let’s share a Deep Dive of this amazing company.

Deep Dive

In five articles, you’ll get a deep dive of Brookfield Corporation (over 79 pages).

It’s our largest deep dive yet.

Here’s what’s coming up in this 5-part series:

• Part 1 (today): The business model and management t…

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It’s a company with one of the widest moats ever.

Let’s teach you everything you need to know today.

Google (Alphabet Inc.) - General Information

• 👔 Company name: Google (Alphabet Inc.)

• ✍️ ISIN: US02079K3059

• 🔎 Ticker: GOOGL

• 📚 Type: Monopoly

• 📈 Stock Price: $293.0

• 💵 Market cap: $3.5 trillion

• 📊 Average daily volume: $3.2 billion

Onepager

Here’s a onepager with the essentials of Google.

You can click on the picture to expand:

15-Step Approach

Now let’s use our 15-step approach to analyze the company.

At the end of this article, we’ll give Google a score on each of these 15 metrics, resulting in a Total Quality Score.

1. Do I understand the business model?

While you’re reading this sentence, approximately 350,000 Google searches are generated.

But did you know that Google once had a different name?

Back in 1998, two Stanford students, Larry Page and Sergey Brin, built a little search engine called BackRub.

It looked at “backlinks” to rank web pages. Not super catchy.

Then something funny happened.

They wanted to name their project after the number googol (a 1 followed by 100 zeros).
But when someone accidentally wrote Google on a check, the name stuck.

The rest is history.

Their goal was to create a search engine that could organize the vast amount of information available on the internet and make it easily accessible to everyone.

They succeeded. Today, Google has a market share of 90% in the search engine market.

Why is it so popular? Google’s products are high-quality and free.

Google makes money in lots of ways:

• Google Search (55.9% of total revenue): Companies pay Google when you click on ads after searching

• Google Cloud (13.7% of total revenue): Companies use Google’s cloud to store data

• Subscriptions, Platforms, and Devices (12.0% of total revenue): People pay for tools like Gmail, Google Workspace, or buy a Pixel phone

• YouTube Ads (10.2% of total revenue): On YouTube, Google earns money when you watch or click an ad

• Google Networks (7.7% of total revenue): Google shows ads on other websites too, and earns money from those clicks

• Other (0.5% of total revenue): Google also makes money from books, movies, and licensing its technology

2. Is management capable?

Google is a special place to work, to say the least. At some point, they rented goats to mow the lawn. Yes. Goats.

It was a more eco-friendly approach.

But here’s the part I love: Employees at Google are allowed to spend 20% of their time on personal projects. The only rule? The project should be useful for the company.

Some of Google’s most iconic innovations, like Gmail, came from these projects.

Google might be a big company. But deep down, it still runs like a founder-led startup.

Sundar Pichai has been the CEO of Google since 2015. He joined the company in 2004 and played a key role in making Google Chrome, Android, and Google Drive.

It’s great to see that the co-founders Larry Page and Sergey Brin are still active board members. Together, they own over 51% of voting rights.

In total, insiders own 6.3% of Alphabet (value: $216 billion). Most of the ownership is held by Page and Brin.

Another interesting shareholder? Warren Buffett.

Buffett once joked in 2017 that he should have bought Google years ago.

Especially since Geico, one of Berkshire’s companies, was spending huge amounts on Google ads.

Charlie Munger said multiple times that they screwed up too:

“I feel like a horse’s ass for not identifying Google earlier … We screwed up."

“I think that’s a good idea not to play where the other people are better … But … if you ask me in retrospect, what was our worst mistake in the tech field … I think we were smart enough to figure out Google. … I would say that we failed you there, and we were smart enough to do it and didn’t do it.”

Recently, Berkshire Hathaway bought 18 million shares of Google.

Today, that stake is worth $4.3 billion.

3. Does the company have a sustainable competitive advantage?

Google (Alphabet) has one of the widest moats ever.

“Google has a huge new moat. In fact, I’ve probably never seen such a wide moat.” - Charlie Munger, 2009

You might be wondering, why can’t competitors copy what Google does?

Google has been collecting data and improving its algorithms for over 25 years. No one can catch up with that.

That’s why Google owns 90% of the search engine market.

To state the obvious, Google has a monopoly.

Even more, Google’s monopoly is so obvious that the term “Google” has become a verb in the English dictionary.

When was the last time you said you would ‘google’ something?

Companies with a sustainable competitive advantage are often characterized by a high and robust Gross Margin and ROIC:

• Gross Margin: 59.2% (Gross Margin > 40%? ✅)

• ROIC: 27.6% (ROIC > 15%? ✅)

4. Is the company active in an attractive end market?

Google’s search engine market faces its biggest threat yet: People are no longer typing every question into Google.

Instead, they’re using AI chatbots like ChatGPT. Why? Because they give an answer and not just a few links.

The majority of Google’s revenue still depends on search ads.

If fewer people search… ad money disappears.

Google knows this. That’s why they’re adding AI to their own search tool.

But it’s not all about search.

They also make money with:

• YouTube (ads + premium subscriptions)

• Android (licenses + Play Store fees)

• Google Cloud (data, AI & enterprise software)

• Hardware (Pixel phones, Nest, Fitbit)

The cloud segment is the real growth driver right now:

5. What are the main risks for the company?

Here are some of the main risks for Google:

• Competition from AI chatbots: More and more people are asking their questions directly to AI assistants like ChatGPT

• Platform dependency: Apple could remove Google as the default search engine on iPhone

• Regulatory pressure: Governments worldwide are launching antitrust lawsuits that could break up or heavily restrict Google’s business

• Weaker innovation: Despite huge resources, Google has struggled to launch successful new products beyond search and YouTube

• Ad market shifts: Advertisers are moving budgets to other platforms like TikTok and Amazon, where targeting is often better and cheaper

• Rich valuation level (see later)

6. Does the company have a healthy balance sheet?

We look at 3 ratios to determine the healthiness of Google’s balance sheet:

• Interest Coverage: 256.4x (Interest Coverage > 15x? ✅)

• Net Debt/FCF: Net cash position equal to 1.5% of total Market Cap (Net Debt/FCF < 4x? ✅)

• Goodwill/Assets: 6.2% (Goodwill/assets not too large? < 20% ✅)

The company’s balance sheet looks very healthy.

7. Does the company need a lot of capital to operate?

We prefer to invest in companies with CAPEX/Sales lower than 5% and CAPEX/Operating Cash Flow lower than 25%.

Google:

• CAPEX/Sales: 20.2% (CAPEX/Sales < 5%? ❌)

• CAPEX/Operating Cash Flow: 51.6% (CAPEX/Operating CF? < 25% ✅)

Doesn’t look good, right?

High capital intensity is only bad when the company isn’t investing in future growth.

When we only take maintenance CAPEX into account, we get the following:

• Maintenance CAPEX/Sales: 5.0% (CAPEX/Sales < 5%? ❌)

• Maintenance CAPEX/Operating Cash Flow: 12.7% (CAPEX/Operating CF? < 25% ✅)

These numbers look very reasonable.

8. Is the company a great capital allocator?

Capital allocation is the most important task of management.

Look for companies that put the money of shareholders to work at attractive rates of return.

Google:

• Return On Equity (ROE): 34.9% (ROE > 20%? ✅)

• Return On Invested Capital (ROIC): 27.6% (ROIC > 15%? ✅)

These capital allocation metrics look attractive.

9. How profitable is the company?

The higher the profitability of the company, the better.

Here’s what things look like for Google:

• Gross Margin: 59.2% (Gross Margin > 40%? ✅)

• Net Profit Margin: 32.2% (Net Profit Margin > 10%? ✅)

• FCF/Net Income: 59.2% (FCF/Net Income > 80%? ❌)

Google is a very profitable company.

The low FCF/Net Income can be explained by the heavy reinvestments in future growth Google is making.

10. Does the company use a lot of Stock-Based Compensation?

Stock-based compensation is a cost for shareholders and should be treated accordingly.

Preferably we want SBCs as a % of Net Income to be lower than 4% and certainly below 10%.

Google:

• SBCs as a % of Net Income: 18.9% (SBCs/Net Income < 10%? ❌)

• Avg. SBC as a % of Net Income past 5 years: 25.3% (SBCs/Net Income < 10%? ❌)

Google uses a lot of SBCs. We will take this into account in our valuation model later on.

11. Did the company grow at attractive rates in the past?

We seek companies that managed to grow their revenue and EPS by at least 5% and 7% per year, respectively.

Google:

• Revenue Growth past 5 years (CAGR): 17.6% (Revenue growth > 5%? ✅)

• Revenue Growth past 10 years (CAGR): 18.3% (Revenue growth > 5%? ✅)

• EPS Growth past 5 years (CAGR): 31.4% (FCF growth > 7%? ✅)

• EPS Growth past 10 years (CAGR): 24.1% (FCF growth > 7%? ✅)

These growth figures look attractive.

12. Does the future look bright?

You want to invest in companies that manage to grow at attractive rates, as stock prices tend to follow EPS growth over time.

Google:

• Exp. Revenue Growth next 2 years (CAGR): 13.8% (Revenue growth > 5%? ✅)

• Exp. EPS Growth next 2 years (CAGR): 17.7% (EPS growth > 7%? ✅)

• EPS Long-Term Growth Estimate: 15.1% (EPS growth > 7%? ✅)

The company should be able to keep growing at attractive rates.

13. Does the company trade at a fair valuation level?

We always use 3 methods to look at the valuation of a company:

• A comparison of the forward PE multiple with its historical average

• Earnings Growth Model

• Reverse Discounted-Cash Flow

A comparison of the multiple with the historical average

The first thing we do is compare the current forward PE with its historical average.

Today, Google trades at a forward PE of 27.6x versus a historical average of 21.6x over the past five years.

This indicates that the company is overvalued compared to its own historical average.

Earnings Growth Model

This model shows you the yearly return you can expect as an investor.

In theory, it’s easy to calculate your expected return:

Here are the assumptions I use:

• EPS Growth = 12% per year over the next 10 years

• Dividend yield = 0.3%

• Forward PE to decline from 27.6x to 20x

The expected yearly return doesn’t meet our threshold of 10% per year.

Reverse DCF

Charlie Munger once said that if you want to find the solution to a complex problem, you should invert. Always invert. Turn the problem upside down.

A reverse DCF shows you the expectations implied in the current stock price.

You try to determine for yourself whether these expectations are realistic or not.

You can learn more about a reverse DCF here: Reverse DCF 101.

The consensus states that Google’s Free Cash Flow for 2026 will be equal to $83.7 billion. Today, the company has 12.1 billion shares outstanding.

We should adjust Free Cash Flow by adding growth CAPEX ($58.6 billion) and subtracting SBC costs ($23.7 billion).

The adjusted FCF is equal to $118.6 billion.

Under these assumptions, our Reverse DCF indicates that Google should grow its Free Cash Flow by 12.6% per year to return 10% per year to shareholders.

It’s possible that Google can grow its FCF by 12.6% but you can’t consider the company as ‘cheap’.

Google:

• Forward PE: 27.6x (lower than its 10-year average? < 21.6x? ❌)

• Earnings Growth Model: 9.5% (Yearly return? < 10%? ❌)

• FCF-Growth Reverse DCF: 12.6% (Realistic growth expectations? ❓)

14. How did the Owner’s Earnings of the company evolve in the past?

Over time, stock prices tend to follow the Owner’s Earnings of a company (EPS Growth + Dividend Yield).

That’s why we want to invest in companies that managed to grow their Owner’s Earnings at attractive rates in the past. This is the case for Google.

Google:

• CAGR Owner’s Earnings (5 years): 31.7% (CAGR Owner’s Earnings > 12%? ✅)

• CAGR Owner’s Earnings (10 years): 24.4% (CAGR Owner’s Earnings > 12%? ✅)

15. Did the company create a lot of shareholder value in the past?

We want to invest in companies that managed to compound at attractive rates in the past.

Ideally, the company returned more than 12% per year to shareholders since its IPO.

Here’s what the performance of the Big Tech company looks like:

• YTD: +53.7%

• 5-year CAGR: +26.6%

• CAGR since IPO (2004): +25.0% (CAGR since IPO > 12%? ✅)

Quality Score

Finally, let’s bring everything together and give the company a Total Quality Score.

As you can see in the table below, Google gets a Total Quality Score of 7.6/10:

I totally get why Warren Buffett bought Google.

The company has a massive moat, high margins, a healthy balance sheet, and a strong brand.

But still… I think there are better opportunities out there right now.

Many high-quality stocks are currently on sale.

More on that this Sunday!

Everything in life compounds
Pieter (Compounding Quality)
PS You are not a Partner of Compounding Quality yet? Discover everything you need to know here.

Book

• Order your copy of The Art of Quality Investing here

Used sources

• Interactive Brokers: Portfolio data and executing all transactions

• Fiscal.ai: Financial data

Disclaimer

As a reader of Compounding Quality, you agree with our disclaimer. You can read the full disclaimer here.

While you are reading this sentence, Amazon has earned about $41,000.

But is it an interesting investment? Let’s find out today.

Amazon.com - General Information

👔 Company name: Amazon.com
✍️ ISIN: US0231351067
🔎 Ticker: AMZN
📚 Type: Owner-Operator
📈 Stock Price: $226
💵 Market cap: $2.4 trillion
📊 Average daily volume: $7.9…

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Palantir's stock price.

Is it still an interesting stock after the big rally? Let’s find out.

Palantir - General Information

• 👔 Company name: Palantir Technologies

• ✍️ ISIN: US69608A1088

• 🔎 Ticker: PLTR

• 📚 Type: Owner-Operator

• 📈 Stock Price: $158.1

• 💵 Market cap: $384.9 billion

• 📊 Average daily volume: $6.4 billion

Onepager

Here’s a onepager with the essentials of Palantir:

15-Step Approach

Now let’s use our 15-step approach to analyze the company.

At the end of this article, we’ll give Palantir a score on each of these 15 metrics.

This results in a Total Quality Score.

1. Do I understand the business model?

We use technology every day. So you're probably familiar with the big tech companies.

But Palantir may not ring a bell. It mainly works behind the scenes.

What does the company do? Analyzing data.

It’s one of the world’s most powerful data analytics companies.

The company was founded in 2003 to help governments spot patterns in data to prevent threats.

Today, it runs on three key platforms:

• Palantir Gotham: Built for governments to track crime, terrorism, and fraud

• Palantir Foundry: Helps businesses make smarter decisions with data

• Palantir Apollo: Keeps Palantir’s software running (Gotham & Foundry) smoothly

The company makes money from contracts:

• Government Contracts (55.3%): Their tools are trusted by the U.S. military, law enforcement, and allies worldwide

• Commercial Contracts (44.7%): Companies in healthcare and energy use Palantir’s software to solve tough problems

2. Is management capable?

Five people co-founded Palantir:

• Alex Karp: Co-Founder and CEO

  • Karp has a philosophical approach and focuses on the long-term strategy

  • He owns 2.4% of the company

• Peter Thiel: Co-Founder and Chairman

  • You might know him as the billionaire investor behind PayPal and an early investor in Facebook

  • Thiel owns 4.4% of total shares outstanding

• Stephen Cohen: Co-Founder, President, and Secretary

  • Helped build Palantir’s main platforms and kept its technology advanced

  • Cohen owns 0.6% of Palantir

• Nathan Gettings and Joe Lonsdale: Co-founders who are not involved in the company anymore

This quote tells you a lot about the philosophy of Palantir:

“We told the Wall Streeters that we will focus on building the long-term health of our company. Not everyone on Wall Street has a short-term focus. Nevertheless, it remains one of the most destructive, corrosive attributes of an otherwise interesting and largely functioning system.” - Alex Karp

The Co-Founders named the company after the palantíri in The Lord of the Rings. These are magical stones used for communication and seeing distant events.

In total, insiders own 7.5% of the company.

3. Does the company have a sustainable competitive advantage?

Palantir has a moat based on high switching costs.

Imagine you’ve used your iPhone for years, saved all your photos, and downloaded tons of apps.

Switching from Apple to Android would be a huge hassle, right?

Palantir is like that for governments and businesses. Once they start using Palantir’s software, they build systems and processes around it.

Moving to a different company’s software would take time, effort, and money.

Furthermore, Palantir also benefits from network effects, a strong brand name, and pricing power.

Companies with a sustainable competitive advantage are often characterized by the following:

• Gross Margin: 80.0% (Gross Margin > 40%? ✅)

• Return On Invested Capital (ROIC:) 47.8% (ROIC > 15%? ✅)

Palantir had a negative ROIC until 2022, as it was still unprofitable until then.

4. Is the company active in an interesting end market?

Palantir is active in an interesting end market.

Palantir is active in Big Data.

This market is expected to grow at a CAGR of 14.9% until 2030, according to Grand View Research.

The Analytics as a Service (AaaS) market is expected to grow even faster: 25.6% (!) per year until 2030.

Palantir’s Foundry platform can benefit from this secular trend.

Here are the main competitors for Palantir:

• Snowflake: Provides cloud-based data warehousing and analytics

• Splunk: Specializes in real-time data monitoring and analysis

• IBM: Provides AI-powered analytics for big data across industries

• Microsoft (Azure): Integrates big data and data warehousing for analytics

5. What are the main risks for the company?

Here are the main risks for Palantir:

• Dependence on government contracts

• Privacy concerns: Their sensitive data raises privacy and ethical questions

• Dependence on Co-Founders

• High costs: The big price tag on Palantir’s software limits its customer base to large organizations

• Complexity: Their software requires significant training and adaptation

• Public perception: Surveillance and data misuse could harm Palantir’s reputation

• Rich valuation levels (see later)

6. Does the company have a healthy balance sheet?

We look at three ratios to determine the healthiness of the balance sheet:

• Interest coverage: / (Interest Coverage > 15x? ✅)

• Net Debt/FCF: Net Cash Position equal to 1.5% of Market Cap (Net Debt/FCF < 4x? ✅)

• Goodwill/Assets: 0.0% (Goodwill to assets < 20%? ✅)

Palantir has a very healthy balance sheet.

7. Does the company need a lot of capital to operate?

The less capital a business needs to operate, the better.

Here’s what things look like for Palantir:

• CAPEX/Sales: 0.6% (CAPEX/Sales? < 5%? ✅)

• CAPEX/Operating Cash Flow: 1.2% (CAPEX/Operating CF? < 25%? ✅)

Software companies like Palantir are typically very capital-light businesses.

8. Capital allocation

Capital allocation is the most important task of management.

Here’s what things look like for Palantir:

• Return on Equity (ROE): 13.9% (ROE > 20%? ❌)

• Return on Capital (ROIC): 47.8% (ROIC > 15%? ✅)

The capital allocation metrics aren’t optimized yet. I expect ROIC and ROE to rise even more in the future.

9. How profitable is the company?

The higher the profitability of the business, the better.

Here’s what things look like for the company:

• Gross margin: 80.0% (Gross margin > 40%? ✅)

• Net Profit Margin: 22.5% (Net Profit Margin > 10%? ✅)

• Average FCF/Net income past 5 years: 104.5% (FCF/Net income > 80%? ✅)

Palantir’s Profit Margins are increasing year after year:

10. Does the company use a lot of Stock-Based compensation?

Stock-based compensation is a cost for shareholders and should be treated accordingly.

Preferably, we want SBCs as a % of Net Income to be lower than 10%.

Palantir:

• SBC of a % of Net Income: 104.5% (SBC/Net income < 10%? ❌)

Stock-based compensation as a percentage of Net Income exceeds 100%.

For Quality Investors, this is a red flag. We will treat this as a cost in our reverse DCF.

11. Did the company grow at attractive rates in the past?

Let’s look at what recent history tells us:

• Revenue growth past 5 years (CAGR): 30.7% (revenue growth > 5%? ✅)

• EPS growth past 5 years (CAGR): / (EPS growth > 7%? ❓)

Palantir has grown at very attractive rates in the past.

Please note that Palantir has only been profitable since 2023.

12. Does the future look bright?

Let’s look at what the estimates are:

• Exp. Revenue growth next 2 years (CAGR): 39.9% (revenue growth > 5%? ✅)

• Exp. EPS growth next 2 years (CAGR): 44.2% (EPS growth > 7%? ✅)

• Long-term growth estimate EPS (CAGR): 40.2% (EPS growth > 7%? ✅)

This outlook looks very attractive. It’s important to know that analysts are usually too optimistic.

Now let’s look at the valuation.

Read more

The Community is an amazing place where all Partners share investment ideas daily.

Just look at this example of Craig Edwards about Infratil ($IFT):

Infratil is up 4,000% since its IPO in 2000.

It gave me an interesting idea…

… What if we launch a stock market competition between Partners?

Every month, Partners can pitch their favorite investment idea. Other Partners can vote for their favorite stock idea.

The winner of the month receives a free subscription to Compounding Quality for 3 months (value: $124).

In this article, these three stocks will be pitched:

1. Nathan’s Famous ($NATH)

How does the company make money?
Nathan’s Famous ($NATH) makes money by selling branded hot dogs through retail, food service, and franchise restaurants.

Boris Sheikman wrote an amazing case about Nathan’s Famous.

Here are the key takeaways in 10 bullet points:

• Business model: Nathan’s Famous isn’t just a hot dog stand on Coney Island. It’s a 100+ year-old brand with a surprisingly smart and scalable business model.

• They don’t make their own food: Nathan’s doesn’t own factories or cook the hot dogs themselves. Instead, they license their secret recipes to big food processors like Smithfield. It’s low-cost, high-margin, and scalable.

• Big sales behind the scenes: They sell Nathan’s-branded products in bulk to big foodservice companies like Sysco. You’ll find them in stadiums, restaurants, and amusement parks (not just at the grocery store).

• A small but growing franchise empire: Nathan’s has 230 franchise locations (most in the US, some abroad). There’s real growth outside the East Coast.

• Marketing that pays instead of costs: Nathan’s generates revenue through events and sponsorships, turning marketing into a profit center. Like their famous Hot Dog Eating Contest.

• They own just 4 restaurants: Nathan’s runs four company-owned stores, including the original Coney Island flagship. These serve more as brand beacons than core revenue drivers.

• Lean and light: They don’t need heavy equipment or big inventory. Production is outsourced. The result: a lean, asset-light business with high returns and low operating risk.

• The moat is in the meat: The real power lies in the brand and the original recipe. Like Coca-Cola or KFC, Nathan’s has a “secret formula” that gives it staying power and pricing strength.

• Quiet compounding: Revenue and gross margins are stable and growing. The company pays a solid dividend, buys back shares, and steadily reduces its debt.

• Skin in the game: Insiders are well-aligned. The CEO owns nearly 2% of the company, and compensation is tied to performance.

• Under the radar: No earnings calls. No media hype. Just a 100-year-old hot dog brand compounding quietly in the background.

You can read the full 11-page investment case of Boris Sheikman here:

Investment case Nathan's Famous

2. Amer Sports ($AS)

How does the company make money?
Amer Sports ($AS) earns revenue by selling premium sports equipment, apparel, and footwear under brands like Salomon, Arc'teryx, and Wilson.

NeilB did some amazing work on Amer Sports. He is a loyal shareholder of the company.

Here’s a summary of his investment case:

• Multi-Brand Powerhouse: Amer owns premium sports and outdoor brands like Arc’teryx, Wilson, and Salomon.

• Three Segments with global reach: Operates across Technical Apparel, Outdoor Performance, and Ball & Racquet Sports. Sales are split globally across the Americas, EMEA, China, and Asia Pacific.

• Premium Direct-To-Consumer (DTC) Focus: Over 40% of sales come from selling directly to customers.

• High growth with low market share: Amer Sports operates in large, fast-growing markets with a relatively small market share (a lot of potential for expansion).

• Moat based on strong brand name: Arc’teryx has pricing power and premium appeal. Salomon and Wilson have strong tech and design reputations, especially in footwear and tennis gear.

• Skin in the game: Insiders own over 20% of the company. They are backed by Lululemon founder Dennis Wilson and Chinese parent Anta Sports (42.4% stake).

• Improving financials: The company is growing while margins are increasing.

• Heavy reinvestments: Amer Sports reinvests all earnings into future growth. They don’t buy a dividend or execute share buybacks.

• Intense competition: Competition from companies like Lululemon, Canada Goose, Nike, …

• High valuation: The company trades at a Forward PE of 45.9x. Management aims for 13-15% revenue growth in 2025.

You can read the full investment case from NeilB here:

Investment case Amer Sports

3. Copart ($CPRT)

How does the company make money?
Copart ($CPRT) makes money by auctioning and storing used, damaged, or salvaged vehicles for insurance companies and other sellers.

Shivam Kashan is a rising star within the Community. He recently created a write-up about Copart.

Here’s what you should know:

• Online auto auction giant: Copart runs a global digital auction platform where insurance companies and other sellers auction used and salvage vehicles to over 1 million buyers in 190+ countries.

• Powerful network effect: The more vehicles on the platform, the more buyers it attracts and vice versa. This flywheel boosts recovery rates for sellers and deepens platform loyalty.

• Capital-light model driven by fees: Copart doesn’t own the cars. It earns fees for listing, title processing, storage, and logistics. This results in high margins, low capital risk, and robust cash flows.

• Wide moat based on real estate: Copart owns over 8,500 acres of land across 250+ yards. Zoning restrictions make it nearly impossible for competitors to replicate this footprint, creating a durable barrier to entry.

• Technological advantage: AI-driven pricing tools, remote imaging (Copart 360), and integrated title services make the system sticky and efficient. This results in switching costs for partners like insurers.

• Strong Financials: No debt and very high margins. Copart has a high ROIC and still reinvests a lot in future growth.

• Founder-led: The founder is still a member of the board. Executives earn stock-based compensation that only vests if the stock exceeds 25% above the strike price. This causes aligned incentives.

• Strong outlook: Potential to expand internationally (Europe, the Middle East, and South America). Over 30% of U.S. cars sold go to foreign buyers, especially in Africa and Eastern Europe, where demand is rising.

• Risk Factors: long-term risk from autonomous vehicles and early-stage international margin pressure.

• Valuation: Copart currently trades at a Forward PE of 29.1x earnings

Here is the full investment case from Shivam:

Investment case Copart

Conclusion

Now let’s dive into the conclusion. I will also share my personal thoughts about the 3 companies pitched.

Read more

It is a cash-generating machine backed by a top-tier M&A team ready to deploy capital.

Let’s uncover this hidden gem.

CMG - General Information

👔 Company name: Computer Modelling Group (CMG)
✍️ ISIN: CA2052491057
🔎 Ticker: TSE: CMG
📚 Type: Oligopoly
📈 Stock Price: CAD 6.86 ($5.0)
💵 Market cap: CAD 566.2 million ($412,5 million)
📊 Average daily volume: CAD 2.0 million ($1.5 million)

Onepager

Here’s a onepager with the essentials of CMG (click on the picture to expand):

15-Step Approach

Now let’s use our 15-step approach to analyze the company.

At the end of this article, we’ll give CMG a score on each of these 15 metrics.

This results in a Total Quality Score.

1. Do I understand the business model?

Computer Modelling Group (CMG) creates software for simulating oil and gas reservoirs.

Their technology helps companies predict how reservoirs will behave over time. It’s like taking off the blindfold for these businesses.

This allows more efficient and cost-effective management of energy resources.

As a result, 75% of the 25 largest oil companies are customers of CMG.

With 65% of its revenue being recurring, their software is very sticky.

While their core business is interesting, Computer Modelling Group is becoming well-known for a different reason.

CEO Pramod Jain is slowly transitioning CMG into a serial acquirer.

And he seems to know how to do it.

Chris Mayer, who recently bought shares, wrote:

"One stock I bought recently is Computer Modelling Group, listed in Canada. There is a certain Constellation Software influence here. Mark Miller is chairman of the board. The largest shareholder is a Constellation board member. And the head of acquisitions is an ex-CSI guy. The CEO, Pramod Jain, gets it.

Constellation Software is the best serial acquirer in the world.

It has created huge shareholder value by buying Vertical Market Software (VMS) companies.

Now, (former) Constellation leaders are helping CMG. This could be a big deal.

CMG’s latest move? The acquisition of Sharp.

Sharp is a software tool that helps engineers interpret seismic data.

Their software transforms large data sets into a ‘simple’ visualization.

2. Is management capable?

Pramod Jain joined Computer Modelling Group in 2022 as the CEO.

At the end of each quarter, Pramod writes a shareholder letter.

I have read them, and he impressed me.

Here is what he wrote in his most recent letter:

"A colleague recently challenged me with the question 'what is that one word that you stand for?' It was an easy answer for me because it is a deeply held and long-standing belief. That one word is 'compounding'. Compounding is said to be the 8th wonder of the world and in both my personal and professional life, I believe 'bring a 1% improved version of yourself every day and you’ll be 37 times better in a year'. Our
employees know this well as I’ve repeated it often since joining CMG. It is something I strive to do every day."

Another word that keeps coming back in his letters is ‘extreme ownership’. This means Pramod will always take full responsibility for his own mistakes.

All of this sounds great.

But words are cheap, actions speak louder.

So let’s dive into some numbers.

Since he joined CMG not so long ago (2022), it’s hard to speak of a track record.

Nevertheless, he is growing Revenue and Net Income at an interesting rate.

As you can see, the average Revenue Growth since Pramod joined is 26.3% per year

And this while the growth before he joined was negative.

It seems like Pramod practices what he preaches.

But is he also a great capital allocator? You will find the answer later.

What’s also interesting is the largest shareholder of CMG.

Edgepoint holds 25.3% of CMG and is managed by Andrew Poster, another Constellation Software board member.

As a result, insider ownership stands at 27.1%.

3. Does the company have a sustainable competitive advantage?

Computer Modelling Group has a moat for sure. And it’s a deep one.

Their biggest competitive advantage? High switching costs.

Once CMG’s software is integrated, it becomes costly and time-consuming for oil and gas companies to switch to a different provider. Engineers also prefer to stick with familiar tools.

But don’t take my word for it, look at the impressive contract renewal rate of over 98%.

Another major advantage is the complexity of its technology.

Developing software that accurately simulates oil and gas reservoirs isn’t a weekend coding project, it requires significant expertise.

The R&D investment needed to compete with CMG is both time-consuming and expensive. This creates high barriers to entry.

According to Pramod, CMG also benefits from strong brand recognition.

The durability of the moat comes from its strong collaboration with universities.

The next generation of engineers is being trained with CMG’s tools, not with the tools of competitors. This is a smart move.

This is exactly the same as what Autodesk and Adobe are doing.

Companies with a sustainable competitive advantage are often characterized by the following:

• Gross Margin: 80.7% (Gross Margin > 40%? ✅)

• Return On Invested Capital (ROIC) 16.9% (ROIC > 15%? ✅)

4. Is the company active in an attractive end market?

Constellation Software has more than 1,000 subsidiaries.

CMG, on the other hand, has only done two meaningful acquisitions with Bluware and Sharp.

Just like Sharp, Bluware is a company that makes special software and services to help scientists understand seismic data.

Bluware has a specific focus on cloud technology.

A comparison between Constellation and CMG isn’t exactly fair.

But it tells you one thing: CMG has a long runway ahead.

They combine this runway with a clear strategy which they call CMG 4.0:

• Growth refers to organic growth in the simulation business

• Profitability (more on this later)

• Acquisitions are where the real compounding will happen

5. What are the main risks for the company?

Investing in CMG, like any other investment, comes with risks.

One of the biggest concerns is the energy industry's cyclical nature. Since CMG serves this sector, fluctuations in energy markets could directly impact its revenue.

Another risk is technological disruption.

To stay ahead, CMG must continue innovating and ensuring it has the best technology in the industry. Falling behind could mean losing ground to competitors.

There’s also the question of organic growth.

Ideally, CMG would expand both organically and through acquisitions, but the long-term growth of its core business remains uncertain to me.

However, the most significant risk is leadership.

Pramod Jain, the CEO, has played a major role in transforming CMG. If he were to leave, it could be a serious setback for the company.

6. Does the company have a healthy balance sheet?

I look at 3 ratios to determine the healthiness of CMG’s balance sheet:

• Interest Coverage: 18.3x (interest coverage > 15x? ✅)

• Net Debt/FCF: Net Cash Position of CAD 5.3 million (Net Debt/FCF < 4x? ✅)

• Goodwill/Assets: 7.7% (Goodwill to assets < 20%? ✅)

Computer Modelling Group has a very healthy balance sheet.

A Net Cash Position is very conservative.

This approach doesn’t surprise me as the CEO wrote:

"Leverage can be an effective tool but, in my career, I have also seen what happens when it goes unchecked. My priority is to deploy our Free Cash Flow primarily and to potentially use leverage strategically to supplement on an as needed basis. Most importantly, I want to reassure our shareholders that I believe in maintaining a strong balance sheet
and that financial leverage should be used carefully and opportunistically to enhance shareholder value without taking on undue risk." - Pramod Jain

7. Does the company need a lot of capital to operate?

I prefer to invest in companies with a CAPEX/Sales lower than 5% and CAPEX/Operating Cash Flow lower than 25%.

Here’s what things look like for CMG:

• CAPEX/Sales: 1.1% (CAPEX/Sales? < 5%? ✅)

• CAPEX/Operating cash flow: 4.8% (CAPEX/Operating CF? < 25%? ✅)

CMG doesn’t need a lot of capital to operate.

This means that there’s more fuel available for the acquisition engine.

Let’s now take a look at the most important metric.

8. Is the company a great capital allocator?

Capital allocation is the most important task of management.

Read more

What he looks for?

• High returns on capital

• Plenty of reinvestment opportunities

• Great management

That’s exactly what serial acquirers offer.

Let’s explore Lifco, a high-performing serial acquirer from the Nordics.

Lifco - General Information

👔 Company name: Lifco
✍️ ISIN: SE0015949201
🔎 Ticker: LIFCO-B
📚 Type: Owner-Operator Stock/Serial Acquirer
📈 Stock Price: SEK 400.2 ($41.8)
💵 Market cap: SEK 169.6 billion ($17.7 billion)
📊 Average daily volume: SEK 1.2 million

Onepager

Here’s a onepager with the essentials of Lifco:

15-Step Approach

Now let’s use our 15-step approach to analyze the company.

At the end of this article, we’ll give Lifco a score on each of these 15 metrics.

This results in a Total Quality Score.

1. Do I understand the business model?

Lifco in one sentence?

Over 257 different revenue streams that have grown by 31.7% per year.

Lifco is a serial acquirer specializing in buying profitable, stable niche companies. Today, they have 257 (!) subsidiaries.

The Swedish company operates in the following industries:

• Systems Solutions (52.0% of Revenue): Provides specialized products and services for various industries. Amayse is a subsidiary in this segment. They provide 3D advertisements.

• Demolition & Tools (24.4% of Revenue): This division delivers essential equipment and accessories for construction and demolition, like the demolition robot from Lifco’s biggest subsidiary, Brokk.

• Dental (23.6% of Revenue): Supplies top-quality materials, equipment, and solutions for dental professionals worldwide. An example is the production of dental implants.

Lifco’s ideal subsidiaries?

• Market leaders in a niche market

• Family-owned businesses

• A long, stable history and proven profitability

• Not relying on one supplier or customer

Lifco thinks as a quality investor.

And it gets even better.

The company runs on a decentralized model. Acquired businesses keep their independence.

It’s like one big Owner-Operator owning many small Owner-Operators.

"The best acquirers don’t buy companies to fix them, they buy great companies and let them keep doing what made them great."

2. Is management capable?

The Power of Serial Acquirers?

Unlike traditional managers, serial acquirers don’t need to master daily operations. Instead, they focus on one thing: buying great businesses and letting them run independently.

Here’s why that matters:

• Regular managers should be great operators and capital allocators

• Management of serial acquirers only need to be great capital allocators

The great news is that capital allocation is easy to measure.

Per Waldemarson became CEO in 2019.

Let’s see how well he is doing:

The numbers speak for themselves. They are great.

Keep reading, you’ll see it’s even better than it looks!

One downside? Per Waldemarson only holds 0.2% of the shares.

But here’s the good news: Carl Bennet owns 50.2%.

He earned this stake through Getinge, which spun off Lifco in 1995. At that time, Carl was the CEO and majority shareholder of Getinge.

He is a committed long-term shareholder.

3. Does the company have a sustainable competitive advantage?

Lifco has a competitive advantage on two levels.

First, its subsidiaries operate in niche markets with little to no competition. This gives them strong pricing power. The long track record of its subsidiaries also proves resiliency.

Second, Lifco itself has a powerful edge: its reputation. Entrepreneurs are careful when selling their businesses. Lifco’s proven track record makes it easier to win their trust.

“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.” - Warren Buffett

Companies with a sustainable competitive advantage are often characterized by the following:

• Gross Profit Margin: 44.2% (Gross Profit Margin > 40%? ✅)

• Return On Invested Capital Without Goodwill (ROIC) 17.8% (ROIC > 15%? ✅)

4. Is the company active in an attractive end market?

The interesting thing about serial acquirers is that they don’t operate in just one market. They diversify their revenue streams.

But doesn’t diversifying lower your return?

Not at all.

This reduced risk doesn’t translate to lower returns, quite the opposite.

A regular business is like a snowball rolling downhill, growing steadily as it picks up snow. A serial acquirer, however, is like an avalanche, where multiple snowballs combine.

Lifco benefits from a dual growth engine:

• Organic Growth means expanding through sales and margin improvement

• Acquired Growth is growth that comes from doing more acquisitions

The runway is still huge for Lifco.

Europe alone has 23.5 million small businesses. Lifco has built a strong base in the Nordics, which has helped it expand into new markets gradually.

5. What are the main risks for the company?

Serial acquirers have become very popular, and for good reasons. They have been excellent investments in the past.

However, this popularity has led to rich valuation levels. As a result, there may be a risk of overvaluation.

Valuation isn’t the only risk.

As Lifco grows, small acquisitions have less impact, meaning they must make more or larger deals to maintain the same growth. This can lead to lower-quality acquisitions.

The Demolition & Tools segment is also highly cyclical. Last year, it recorded negative organic growth for the first time.

Competition is another challenge. With more companies looking to acquire niche businesses, prices could rise, making acquisitions more expensive and reducing Lifco’s returns.

6. Does the company have a healthy balance sheet?

I look at 3 ratios to determine the healthiness of Lifco’s balance sheet:

• Interest Coverage: 9.9x (interest coverage > 15x? ❌)

• Net Debt/FCF: 1.4x (Net Debt/FCF < 4x? ✅)

• Goodwill/Assets: 39.4% (Goodwill to assets < 20%? ❌)

Despite two red crosses, Lifco has a very healthy balance sheet. Here’s why:

• Lifco's predictable revenue eases interest coverage concerns

• Frequent acquisitions explain the higher Goodwill

7. Does the company need a lot of capital to operate?

I prefer to invest in companies with a CAPEX/Sales ratio lower than 5% and a CAPEX/Operating Cash Flow ratio lower than 25%.

Here’s what things look like for Lifco:

• CAPEX/Sales: 1.8% (CAPEX/Sales? < 5%? ✅)

• CAPEX/Operating Cash Flow: 10.8% (CAPEX/Operating CF? < 25%? ✅)

Lifco doesn’t need a lot of capital to operate.

8. Is the company a great capital allocator?

Capital allocation is the most important task of management.

We are looking for businesses capable of allocating shareholders' resources effectively.

Lifco:

• Return on equity (ROE): 19.8% (ROE > 20%? ❌)

• Return on Capital (ROIC): 10.8% (ROIC > 15%? ❌)

Remember that Per Waldermarson (CEO) was an even better capital allocator than we first thought?

Here is the catch.

39.4% of Lifco’s assets are intangibles.

That’s exactly why it makes more sense to look at Return on Capital Employed, and ROIC without Goodwill

• Return on Capital Employed: 19.5% (ROCE > 15%? ✅)

• ROIC without Goodwill: 17.8% (ROIC without Goodwill > 15%? ✅)

These numbers look great.

Here’s an evolution of Lifco’s ROCE and ROE:

The one thing I don’t like is the fact that Lifco pays a dividend (current dividend yield: 0.7%).

I'd prefer it if they kept compounding capital internally.

"We can retain and reinvest earnings at higher rates of return than our shareholders could achieve on their own." - Warren Buffett

9. How profitable is the company?

The higher the profitability of the company, the better.

Here’s what things looks like for Lifco:

• Gross Profit Margin: 44.2% (Gross Profit Margin > 40%? ✅)

• Net Profit Margin: 12.7% (Net Profit Margin > 10%? ✅)

• FCF/Net income: 116.5% (FCF/Net income > 80%? ✅)

Lifco is a very profitable company. We love to see this. More cash means more acquisitions, which drives their growth engine.

"If your business has a high margin, you are doing something well because your customers accept paying a high price." - Fredrik Karlsson, former CEO of Lifco

10. Does the company use a lot of Stock-Based Compensation?

Stock-based compensation is a cost for shareholders and should be treated accordingly.

Preferably, we want SBCs as a % of Net Income to be lower than 10%.

Lifco:

• SBCs of a % of Net Income: 0.0% (SBSs/Net income < 10%? ✅)

• Avg. SBC as a % of Net Income past 5 years: 0.0% (SBCs/Net income < 10%? ✅)

It’s good seeing Lifco doesn’t fool its investors with Stock-Based Compensation.

11. Did the company grow at attractive rates in the past?

I look for companies that grew their revenue and EPS by at least 5% and 7% per year in the past.

Let’s look at what recent history tells us:

• Revenue growth past 5 years (CAGR): 13.9% (revenue growth > 5%? ✅)

• Revenue growth past 10 years (CAGR): 14.5% (revenue growth > 5%? ✅)

• EPS growth past 5 years (CAGR): 16.8% (EPS growth > 7%? ✅)

• EPS growth past 10 years (CAGR): 19.5% (EPS growth > 7%? ✅)

The Swedish investment powerhouse has grown at attractive rates.

12. Does the future look bright?

You want to invest in companies that can grow at attractive rates, as stock prices tend to follow EPS growth over time.

Lifco:

• Exp. Revenue growth next 2 years (CAGR): 10.1% (revenue growth > 5%? ✅)

• Exp. EPS growth next 2 years (CAGR): 18.5% (revenue growth > 7%? ✅)

• Long-term growth estimate EPS (CAGR): 7.4% (EPS growth > 7%? ✅)

This outlook looks attractive. I think Lifco can grow its earnings by more than 7.4% in the long term.

13. Does the company trade at a fair valuation level?

I always use 3 methods to look at the valuation of a company:

• A comparison of the forward PE multiple with its historical average

• Earnings Growth Model

• Reverse Discounted-Cash Flow

A comparison of the multiple with the historical average

I first compare the current Forward PE with its historical average over the past 10 years.

Today, Lifco trades at a Forward PE of 42.5x compared to a historical average of 26.3x.

Lifco looks richly valued today based on this metric.

Earnings Growth Model

This model shows you the yearly return you can expect as an investor.

In theory, it’s easy to calculate your expected return:

Here are the assumptions I use:

• EPS Growth: 14.0% per year over the next 10 years

• Dividend Yield: 0.7%

• Forward PE to decline from 42.5x to 25.0x

Please note that my 14.0% EPS growth assumption is higher than analysts expectations (7.4%).

Here’s the reasoning:

• Lifco’s runway is still huge

• Per Waldemarson (CEO) is a great capital allocator

• The EPS growth of the past 5 years equals 16.8%

Reverse DCF

Charlie Munger once said that you should invert if you want to solve a complex problem. Always invert. Turn the problem upside down.

A reverse DCF shows you the expectations implied in the current stock price.

You try to determine for yourself whether these expectations are realistic or not.

You can learn more about a reverse DCF here: Reverse DCF

The consensus states that Lifco’s Free Cash Flow over the next 12 months will be equal to SEK 4,833.0 billion.

We subtract the Stock-Based Compensation (SEK 0) to arrive at FCF in year 1 of SEK 4,833.0 billion.

Under these assumptions, our Reverse DCF indicates that Lifco should grow its Free Cash Flow by 15.7% per year to return 10% per year to shareholders.

Lifco seems to be priced to perfection. There is no margin of safety.

Lifco:

• Forward PE: 42.5x (lower than its 10-year average? < 26.3x? ❌)

• Earnings Growth Model: 10.6% (Yearly return? < 10%? ✅)

• FCF-Growth Reverse DCF: 15.7% (Realistic growth expectations? ❌)

14. How did the Owner’s Earnings of the company evolve in the past?

Over time, stock prices tend to follow the Owner’s Earnings of a company.

Owner's Earnings = EPS Growth + Dividend Yield

That’s why I want to invest in companies that have grown their Owner’s Earnings at attractive rates in the past.

Lifco:

• CAGR Owner’s Earnings (5 years): 17.5% (CAGR Owner’s Earnings > 12%? ✅)

• CAGR Owner’s Earnings (10 years): 20.2% (CAGR Owner’s Earnings > 12%? ✅)

15. Did the company create a lot of shareholder value in the past?

I want to invest in companies that have compounded at attractive rates in the past.

Ideally, the company has returned more than 12% per year to shareholders since its IPO.

Here’s what the performance of Lifco looks like:

• YTD: +21.3%

• 5-year CAGR: 30.0%

• CAGR since IPO in 2014: 31.7% (CAGR since IPO > 12%? ✅)

$10,000 invested in Lifco at its IPO in 2014 would now be worth $180,510.

Quality Score

Finally, let’s bring everything together and give the company a Total Quality Score.

Read more

That means a $10,000 investment turned into almost $1 million.

Will the journey continue? Let’s find out.

TerraVest - General Information

• 👔 Company name: TerraVest Industries

• ✍️ ISIN: CA88105G1037

• 🔎 Ticker: TVK.TO

• 📚 Type: Serial Acquirer/Owner-Operator Stock

• 📈 Stock Price: CAD 170.4 ($121.9)

• 💵 Market cap: CAD 3.3 billion ($2.4 billion)

• 📊 Average daily volume: CAD 7.7 million ($5.5 million)

This amazing investment case was made by my friend Chris Waller.

He is the Founder and Portfolio Manager of Plural Investing. Chris previously worked at Goldman Sachs and has an MBA from the Value Investing Program at Columbia Business School. Furthermore, Chris does an amazing job writing Hidden Gems Investing on Substack.

Onepager

Here’s a onepager with the essentials of TerraVest:

15-Step Approach

Now let’s use our 15-step approach to analyze the company.

At the end of this article, we’ll give TerraVest a score on each of these 15 metrics.

This results in a Total Quality Score.

1. Do I understand the business model?

In remote parts of the US and Canada, many homes are heated with propane.

TerraVest makes storage tanks for propane and other gases, like ammonia and industrial gases.

The company is also expanding into new niches like water storage, LNG, and even hydrogen.

Their mission is simple:

TerraVest can be seen as a serial acquirer. Its business model is to:

• Acquire: Sellers are generally mom & pops or less price-sensitive sellers.

• Restructure: It takes 1-3 years to complete and often involves bulk buying discounts on raw materials like steel and valves, consolidation of factories, labor reductions, cross-selling, and always an increased focus on profits.

• Operate: A decentralized approach where businesses receive limited interference from the core Terravest team, which is just a handful of people.

TerraVest has acquired over 20 companies since 2014.

On average, they pay 10x Free Cash Flow. However, after they restructured the acquired business, they paid ‘only’ 6x Free Cash Flow in hindsight as they make the business more efficient.

The great news? TerraVest has a long runway to keep acquiring businesses, with hundreds of mom & pops to acquire across these niches.

How does the company create so much value after an acquisition?

Let’s take the example of a 60,000-gallon propane tank.

TerraVest increases the gross profit by over 75%:

There are three main reasons why TerraVest can significantly increase the profitability of acquired businesses:

1. Mindset

2. Buying power

3. Shared resources

1. Mindset

Many of the companies that TerraVest buys were primarily focused on revenues and growth. TerraVest is focused on costs and profits.

TerraVest will shut unprofitable operations, pay salespeople on margins rather than volumes, reward staff throughout the company with a profit share, and reorganize its businesses so that each one is focused on manufacturing its highest margin products.

In some cases, TerraVest has invested in modernizing production. For instance, the company invested $8.5 million into a new 110,000 square feet plant that consolidated production from several acquisitions into a single site in Cowansville, Quebec, in 2019. Some manufacturing processes were modernized, and production capacity doubled.

2. Buying power

TerraVest is the largest player in most of its markets, and that scale is the company's largest and most sustainable competitive advantage.

While many of the acquired companies buy steel from distributors, TerraVest buys directly from mills, and its scale gives it bulk-buying discounts of 10-30%. This is a critical saving as steel is often over half the cost of producing a tank. Similarly, TerraVest achieves savings by procuring valves and other parts.

The company's scale also means it can sometimes afford to stock more inventory than a mom & pop. For instance, TerraVest can buy $10 million in steel plates and can sit on that inventory, whereas the previous owners may have risked bankruptcy if they invested that into working capital and orders did not quickly follow. That means customers receive the products sooner, and their projects are not held up.

3. Shared resources

TerraVest often consolidates multiple facilities into one.

The Canadian company sometimes has several businesses that make similar products. Depending on production schedules, backlogs, and location, the company selects the shop that maximizes delivery speed and minimizes costs. The company’s businesses also share leads.

2. Is management capable?

Warren Buffett once said:

“Over time, the skill with which a company’s managers allocate capital has an enormous impact on the enterprise’s value.”

TerraVest’s management is an exceptional capital allocator and well incentivized.

Management pay is very low, with most board members getting paid CAD 44,000-54,000. The CEO earned a base salary of CAD 412,500 last year.

Most key managers are extremely incentivized through shares. The majority of their net worth is invested in TerraVest.

We spoke with eight sources who have worked closely with the CEO, Dustin Haw.

They told us he is a star. Here’s why:

• Haw was hired in 2012 by Canadian investor George Armoyan after earning a PhD in physics. He started as an analyst at Clarke, then quickly took charge of TerraVest.

• Haw is both a great operator and capital allocator. A source said: ‘Unlike most in finance, he knows how things are made. He understands customers and manufacturing, which is rare.’

• He prioritizes returns on capital over growth or empire-building, redeploying funds where they generate the most value.

• Haw runs a lean, cost-conscious business. There’s no fancy HQ or investor relations team—he handles inquiries himself.

• He has a strong reputation for integrity. Sources and our own experience confirm he’s a trusted partner.

• Despite his success, he avoids publicity. TerraVest skips earnings calls and only recently started engaging with analysts.

• Haw is deeply invested, earning a salary of CAD 412,500 but holding CAD 74M in stock and options.

• At 40, he has a long future ahead to keep compounding.

3. Does the company have a sustainable competitive advantage?

TerraVest has a strong moat based on its Efficient Scale and Cost Advantages.

Efficient Scale

The large scale compared to mom-and-pops brings two advantages:

• Inventory advantage: TerraVest can hold a larger inventory than its competitors

  • This could drastically improve delivery time compared to mom-and-pops

• Consolidation: Merging multiple facilities into one reduces costs

  • In 2019, it spent $8.5 million to modernize production. It built a 110,000-square-foot facility in Cowansville, Quebec. Manufacturing processes were upgraded, and production capacity doubled.

Cost Advantage

TerraVest has a Cost Advantage compared to the competition. Other players in the market buy steel and other parts from distributors. TerraVest buys directly from mills.

Furthermore, the company can buy larger quantities compared to mom-and-pops.

This gives them a discount of 10-30%.

Companies with a sustainable competitive advantage are often characterized by the following:

• Gross Margin: 29.2% (Gross Margin > 40%? ❌)

• Return On Invested Capital (ROIC) 13.9% (ROIC > 15%? ❌)

In 2014, TerraVest’s management took over. Back then, most of its businesses made a 10% return on invested capital (ROIC). The company mainly sold oil and gas equipment. It also sold old-fashioned products like cast-iron boilers, which were losing popularity.

Management has redeployed capital to areas of higher returns. Incremental returns on capital are 20-25%.

This is why TerraVest’s ROIC has been increasing over time. It’s something we love to see.

That is important because what matters is the returns that the next dollar of capital will generate when deployed, not what previous dollars have generated.

As management continues to redeploy capital at 20-25%, ROIC at a group level should continue to increase.

4. Is the company attractive in an interesting end market?

TerraVest has grown revenues at a CAGR of 25.5% over the last five years.

How?

While TerraVest’s core markets are not growing rapidly, management continues to make smart acquisitions and reallocate capital into more attractive markets like LNG, hydrogen, and water storage.

Many people assume that the use of propane is declining, but it is in fact stable:

More importantly, there is a long runway for TerraVest to continue its acquisition strategy.

At a recent trade show, TerraVest was one of many exhibitors. Many of the others are potential acquisition targets for the company.

5. What are the main risks for the company?

The biggest risk to TerraVest is succession risk.

Management is crucial to making successful acquisitions. The company will only collaborate with smart capital allocators.

However, the CEO Dustin Haw is only 40…

And has most of his net worth invested in the stock.

Haw is very incentivized to stay at TerraVest and continue growing his net worth with the company.

Another big risk for the company is that the US and Canada move away from propane and other fuels over time.

Nevertheless, the US system means that regulations and building codes differ by state, and Canadian local governments tend to be more favorable.

The move against propane is likely a multi-decade process.

6. Does the company have a healthy balance sheet?

We look at three ratios to determine the healthiness of the balance sheet:

• Interest coverage: 4.9x (interest coverage > 15x? ❌)

• Net Debt/FCF: 2.7x (Net Debt/FCF < 4x? ✅)

• Goodwill/Assets: 8.9% (Goodwill to assets < 20%? ✅)

TerraVest has a healthy balance sheet.

7. Does the company need a lot of capital to operate?

The less capital a business needs to operate, the better

Here’s what things look like for TerraVest:

• CAPEX/Revenue: 6.1% (CAPEX/Revenue < 5%? ❌)

• CAPEX/Operating cash flow: 35.6% (CAPEX/Operating CF < 25%? ❌)

Manufacturers like TerraVest are quite capital-intensive.

However, the numbers already look better when you exclude Growth CAPEX:

• Maintenance CAPEX/Revenue: 4.6% (CAPEX/Revenue < 5%? ✅)

• Maintenance CAPEX/Operating Cash Flow: 27.0% (CAPEX/Operating CF < 25%? ❌)

Now let’s dive into the most important fundamentals of the company.

Read more

Warren Buffett's announcement of his ‘retirement’ was emotional.

Let’s discuss everything you need to know today.

TV Show

Last Tuesday, I was a guest on the Belgian TV Show ‘De Afspraak’.

Why? To talk about Warren Buffett, of course.

Dutch-speaking Partners can rewatch the episode here:

Law of large numbers

What is the key challenge of Berkshire Hathaway?

The law of large numbers.

It’s much easier for a company with $5 million in revenue to 10x its sales than for Apple, which already generates $400 billion in yearly revenue.

That’s why Buffett says that anyone who says size doesn’t hurt performance is selling.

As you can see in the table, that’s why the outperformance of Berkshire Hathaway gradually decreased over the years:

Today, Berkshire Hathaway sits on a massive cash position of $347 billion.

There are two main reasons for this:

• Warren Buffett thinks the market is overvalued right now

• He can’t find enough attractive investment opportunities that move the needle for Berkshire

Finding new investment opportunities will be the key challenge for Greg Abel, Warren Buffett’s successor.

Today, Berkshire Hathaway has over $1 trillion (!) in assets.

It can be seen as the Titanic. The boat is so large that it’s hard to change direction (I don’t think Berkshire Hathaway will sink, though).

Last weekend, Jason Zweig wrote an excellent piece called ‘Why There Will Never Be Another Warren Buffett’. I would highly recommend you read it.

Tariffs

Another important takeaway from the meeting?

Buffett is not pleased (at all) with the import tariffs. He mentioned other countries could interpret it as an act of war.

Nobody wins in a trade war. It makes no sense for a country like the United States to produce goods like shoes (which are now produced for $2-$3 in Vietnam).

Import tariffs lead to the following:

• Higher inflation

• A higher unemployment rate

• Many goods will become more expensive

Would you invest in Berkshire?

A lot of people ask me whether I would invest in Berkshire today.

The answer? I think Berkshire is amazing.

Over the past 5 years, Berkshire Hathaway returned +190% versus 90% for the S&P 500.

I think Berkshire Hathaway is still an amazing investment.
But I also think that their large size hurts their performance.

You should see Berkshire Hathaway as a holding company that will probably slightly outperform the S&P 500 in the long term.

The great thing about Berkshire Hathaway is that it provides diversification opportunities:

• When the stock market goes up, Berkshire will lag the S&P 500

• When the stock market goes down, Berkshire will outperform

"We will continue to underperform in strong bull markets and outperform in bear markets." - Warren Buffett

3 Stocks Buffett Would Love

I returned from Omaha with a lot of interesting investment ideas.

Let’s discuss three of them.

3. Markel ($MKL)

How does Markel make money?
Markel makes money by selling insurance policies, investing the premiums, and earning returns on those investments.

Markel hosted their annual Markel lunch on Sunday.

Simon Wilson, the head of insurance since March 2025, made a strong impression.

He was also very honest about the recent underperformance versus competitors.

Wilson seems transparent and very focused. It’s exactly what we want to see.

He managed to bring down the combined ratio from 90.4% in 2022 to under 80% for the Markel International subsidiary.

The combined ratio is a key number for insurance companies. The lower this ratio, the better.

You can calculate the combined ratio by taking the sum of all expenses and incurred losses and dividing this number by the total premiums an insurance company receives.

• Combined ratio > 100%: The insurance company makes a loss

• Combined ratio < 100%: The insurance company makes a profit

The fact that Wilson brought down the combined ratio of the international subsidiary by over 10% is an amazing achievement.

A tremendous amount of shareholder value would be created if Wilson could do something similar for Markel’s global operations.

A picture of Tom Gayner (CEO Markel) and me taken in 2023 during the Berkshire weekend:

By the way, you can rewatch the recording of Markel from last weekend here:

2. Dillard’s ($DDS)

How does the company make money?
Dillard's makes money by selling clothing, cosmetics, and home goods in its department stores and online.

Dillard’s is an idea I got from my friend Todd Lechtenberger. He is the CEO of Amalfi Investments.

Dillard’s is not your classical Quality Play.

The positive? They have a healthy Net Cash Position, an ROIC of 40.7%, and a Free Cash Flow Margin of 9.2%.

On the other hand, the company has not been growing at attractive rates recently.

The main reason for investing in Dillard’s? A cheap valuation in combination with heavy share buybacks.

Dillard’s currently trades at a FCF Yield of 14.3%. Over the past 10 years, they bought back 55.7% (!) of their outstanding shares.

That’s an average of 8.6% per year.

As Dillard’s has a dividend yield of 0.3%, this means the average shareholder yield (Dividend Yield + Buyback Yield) equals 8.9% per year.

Now let’s dive into our favorite stock idea (spoiler alert: it’s a company I already own).

Read more

They are the building blocks of high integrity.

That’s why I should confess that I made a mistake…

I am thinking about launching an exclusive series about Tiny Compounders.

Those are Micro Cap Quality Stocks with tremendous upside potential. 

It uses exactly the same philosophy as Compounding Quality, but focuses on very small companies. Think about trying to invest in Apple twenty years ago.

Please note that we'll never write about these companies via Compounding Quality (and they are not in our coverage) as we would influence the stock price too much. 

Because these companies are so small, the series will be very exclusive. Maximum 200 people will be allowed and it will be quite expensive. 

If you are interested, you can put yourself on the waiting list here.

Join waiting list Tiny Titans

Why I’m Done Buying Small Caps

Monday (17 February), I wanted to buy a new high-quality compounder for Our Portfolio.

(You can read the announcement here)

Unfortunately, my limit order (GBP 80) didn’t go through because the stock rose significantly on the buy announcement. That day, the stock went up over 10% intraday.

The reason for this price increase wasn’t the right one. The company didn’t report earnings, acquire a new business, or make any other fundamental change.

The increase was due to our announcement.

I don’t want this to happen again.

That’s why I am considering not buying Small Caps anymore.

This wouldn’t be great news. Small Caps have the potential to be life-changing investments. As you might know, the best-performing stock in Our Portfolio is a Small Cap.

On average, Small Caps outperform the market by 3.7%.

I still want to provide you with high-quality Small Caps without influencing the price too much.

That’s why I launched this new series…

Small Cap Of The Month

In this new series, we’ll introduce you to high-quality small businesses.

These companies can be great investments, but they might be too small to buy for Compounding Quality.

Our idea this month? Harvia.

Harvia - General Information

👔 Company name: Harvia
✍️ ISIN: FI4000306873
🔎 Ticker: HEL:HARVIA
📚 Type: Oligopoly
📈 Stock Price: 46.9 EUR
💵 Market cap: 875 million EUR
📊 Average daily volume: 1.3 million EUR

1. How does Harvia make money?

Finland is famous for its stunning nature, being the happiest country in the world, and its sauna culture.

Harvia plays a big role in this. This Finnish company is the global leader in the sauna and spa market.

Recently, Harvia expanded to the US by acquiring ThermaSol, a steam room manufacturer.

Harvia’s management strongly believes in acquisitions like ThermaSol.

The sauna and spa market is highly fragmented, making expansion through acquisitions interesting.

To some extent, it can be seen as a serial acquirer.

What about Harvia’s moat? The company has a 75-year history, proving its resilience. Its strong brand and reputation deepen their moat.

Harvia makes money in five ways:

• Heating Equipment (53%) includes both electric and wood-burning sauna heaters

• Saunas & Hot Tubs (25%) covers complete sauna cabins and outdoor hot tubs

• Steam Products (9%) features steam generators and related accessories

• Accessories & Heater Stones (7%) includes essential sauna additions such as sauna stones

• Spare Parts & Services (6%) covers replacement parts and maintenance

The sauna market is expected to grow at a CAGR of 5.0% in the coming years.

2. Management

Matias Järnefelt became Harvia’s CEO in 2023.

Interestingly, while Harvia discloses the number of shares its executives own, it does not provide this information for the CEO.

In an ideal world, we would like to have this information.

Before joining Harvia, Matias gained experience at Nokia Corporation.

The company’s CFO, Ari Vesterinen, holds 149,664 shares, currently valued at roughly €7.0 million.

Overall, insider ownership stands at 6.1%.

3. Fundamentals

Let’s dive into the numbers.

Right away, one figure stands out, the high Return On Invested Capital.

As a quality investor, I always begin by evaluating a company’s capital allocation skills.

In Harvia’s case, a Return on Invested Capital (ROIC) of 17.0% is a strong indicator of efficiency.

A high ROIC often suggests a company can turn its investments into solid earnings.

Let’s put that theory to the test.

As you can see, Harvia has proven to be highly profitable, with a strong track record of growing Net Income.

However, it’s also clear that the company has faced some recent challenges.

The main reason? The impact of the war in Ukraine. Harvia has exited its operations in Russia.

Despite this setback, it’s good to see Harvia has found its way back to growth.

That’s it for the Income Statement.

Let’s now take a look at the Balance Sheet.

I always use the following ratios to determine how healthy the Balance Sheet is:

• Interest coverage: 7.8x (Interest Coverage > 15x? ❌)

• Net Debt/FCF: 2.2x (Net Debt/FCF < 4x? ✅)

• Goodwill/Assets: 33.0% (Goodwill to assets < 20%? ❌)

The higher Goodwill is normal because of the acquisitions.

Harvia has a healthy Balance Sheet, but in an ideal world, we like to see a higher Interest Coverage.

Finally, there’s the Cash Flow Statement.

When analyzing a Cash Flow Statement, I focus on three key numbers.

First, there’s Stock-Based Compensation.

Some companies use this method to reward employees, but Harvia takes a different approach. It doesn’t rely on stock-based incentives at all, which is great to see.

Next, I look at Earnings Quality, which measures how efficiently a company converts Net Income into Free Cash Flow.

As a rule of thumb, I want Free Cash Flow/Net Income to be higher than 80.0%. Harvia easily passes this test.

Finally, there’s capital intensity.

The less capital a company needs to operate, the better.

Harvia’s CAPEX-to-Sales ratio stands at just 3.2%. This indicates Harvia is a capital-light business.

In general, Harvia’s numbers look very good.

4. Valuation

I always use 3 methods to look at the valuation of a company:

• A comparison of the forward PE multiple with its historical average

• Earnings Growth Model

• Reverse Discounted-Cash Flow

A comparison of the multiple with the historical average

I first compare the current forward PE with its historical average over the past 10 years.

Today, Harvia trades at a forward PE of 28.0x compared to a historical average of 20.6x.

Based on this metric, the company looks expensive.

Earnings Growth Model

This model shows you the yearly return you can expect as an investor.

In theory, it’s easy to calculate your expected return:

Here are the assumptions I use:

• EPS Growth: 10.0% per year over the next 10 years

• Dividend Yield: 1.6%

• Forward PE to decline from 28.0x to 20.0x

Reverse DCF

Charlie Munger once said that if you want to find a solution to a complex problem, you should invert. Always invert. Turn the problem upside down.

A reverse DCF shows you the expectations implied in the current stock price.

You try to determine for yourself whether these expectations are realistic or not.

You can learn more about a reverse DCF here: Reverse DCF

The consensus states that Harvia’s Free Cash Flow over the next 12 months will be equal to €35.8 million.

Our Reverse DCF indicates that Harvia should grow its Free Cash Flow by 9.9% per year to return 10% per year to shareholders.

In the past 5 years, Harvia has grown its FCF at an average rate of 11.1%.

Going forward, analysts expect a long-term EPS growth of 18.0%.

In my opinion, this looks a bit too optimistic. That’s why I believe Harvia has little Margin of Safety at the current valuation levels.

Harvia:

• Forward PE: 28.0x (lower than its 5-year average? < 20.6x? ❌)

• Earnings Growth Model: 8.8% (Yearly return? > 10%? ❌)

• FCF-Growth Reverse DCF: 9.9% (Realistic growth expectations? ❓)

5. Is Harvia Interesting Today?

Now let’s bring everything together.

Read more

One of the best compounders of today? MercadoLibre.

Its Intrinsic Value (Owner’s Earnings) has doubled every two years!

Is MercadoLibre the next Amazon? Let’s have a look.

MercadoLibre - General Information

👔 Company name: Mercad…

Read more

“I put two children through Harvard by trading options. Unfortunately, they were my broker’s children.” 

Today, we’ll look at the broker I use: Interactive Brokers.

Interactive Brokers - General information

👔 Company name: Interactive Brokers
✍️ ISIN: US45841N1072
🔎 Ticker: IBKR
📚 Type: Owner-Operator
📈 Stock Price: $157.9
💵 Market cap: $66.7 billion
📊 Average daily volume: $143 million

Onepager

Here’s a onepager with the essentials of Interactive Brokers:

15-Step Approach

Now, let’s use our 15-step approach to analyze Interactive Brokers.

At the end of this article, we’ll give Interactive Brokers a score on each of these 15 metrics.

This results in a Total Quality Score.

How we use Interactive Brokers

Before we discuss the investment case, it’s important to understand that I execute all my transactions through Interactive Brokers.

As you can see, our CAGR is significantly better than the S&P 500:

The screenshot above is the official track record from my account. If you want to explore more, you can find everything you need to know about Interactive Brokers here.

1. Do I understand the business model?

Interactive Brokers is an American online broker with over 3.6 million client accounts.

The company lets investors buy and sell almost any asset through its electronic platforms. It offers products from over 150 exchanges.

The company makes money in two ways:

• Interest income (60.5%): The interest income is earned on the cash reserves of around $100 billion that clients hold in their accounts

  • Interactive Brokers invests these reserves into debt securities and margin loans. They pay a slightly smaller rate to their customers, generating a spread on these cash reserves

  • Sounds like a bank? Yes! But there are some important differences to banking, on which we will come back later

• Non-interest income (39.5%): All commissions and fees clients pay for using the brokerage platform

  • For example, if you submit a buy order to Interactive Brokers, you pay a small commission to the company for executing this order

The company is active in almost 200 countries, but most of its revenue (69%) is generated in the US.

Interactive Brokers serves all types of customers. This ranges from individual investors to large hedge funds.

The best way to analyze a stock? Explore it yourself.

You can take a look at Interactive Brokers here.

2. Is management capable?

Thomas Peterffy founded the company in 1977. He arrived in the United States as a Hungarian migrant in 1965.

It’s great seeing Peterffy is still the Chairman.

Only 25.8% of the company is publicly held. The remainder is owned by IBG Holdings LLC, which is 91.4% owned by Thomas Peterffy and his affiliates.

This means we’re talking about an Owner-Operator Stock.

Milan Galik, the current CEO, took over the executive role from Mr. Peterffy in 2019. He has been with IBKR since 1990.

Many top leaders have been at the company for a long time. For example, the Vice Chairman joined in 1988, the CFO in 1987, and the Chief Information Officer in 1985.

3. Does the company have a sustainable competitive advantage?

Interactive Brokers has a wide moat based on cost advantages.

The company has an extreme focus on efficiency, technology, and automation. This leads to profit margins far exceeding those of competitors.

They also have something in common with Amazon that few other businesses have: An extreme customer focus.

How? It offers rates on cash reserves that exceed competitors’ rates by far:

• The company is very transparent to its customers regarding costs, in contrast to many other (online) brokers

• It doesn’t sell order flow to market makers, even though doing so could make the company more money in the short term. This choice saves customers money.

Companies with a sustainable competitive advantage typically show a high and strong Gross Margin and ROIC.

Interactive Brokers:

• Gross Margin: 90.7% (Gross Margin > 40%? ✅)

• ROIC: 22.4% (ROIC > 15%? ✅)

4. Is the company active in an attractive end market?

Interactive Brokers (IBKR) benefits from key trends in asset management.

First, global investment levels keep rising: almost $30 trillion is managed by mutual funds today.

Three major trends support IBKR’s growth:

1. More hedge funds: Assets in hedge funds grew from $118 billion in 1997 to over $5 trillion today. These funds use complex strategies that need advanced tools and data, exactly what IBKR offers with features like its option strategy builder and volatility lab.

2. More ETFs: The number of ETFs has exploded from 276 in 2003 to nearly 9,000 in 2022. These cost-sensitive funds often choose low-cost platforms like IBKR for trading.

3. More retail investors: In 2021, retail investors managed 52% of the global invested money. Many are under 35, tech-savvy, data-driven, and cost-aware — a perfect match for IBKR’s platform.

5. What are the main risks for the company?

There are three key risks to understand about Interactive Brokers.

1. Is IBKR a bank?

Some people consider Interactive Brokers a bank because they receive quite some interest income.

This can be seen as a risk since banks are greatly affected by interest rates.

The comparison makes sense, but some differences are important to keep in mind:

• Interest Rates: IBKR isn’t as affected by rising interest rates because it only invests clients’ cash in short-term assets.

• Leverage: Customers who want to borrow money to invest need to put up a lot of collateral.

• Assets: About 99% of IBKR’s assets are liquid, making a situation like Silicon Valley Bank's collapse unlikely when interest rates rise.

2. What to do when interest rates fall?

The graph below shows a connection between the average earnings IBKR gets from customer cash and the interest rate set by the central bank.

If interest rates fall, IBKR earns a little less from interest. Some analysts on Wall Street, who often think short-term, might lower their price targets and recommendations.

3. Future of the company’s management?

CEO Milan Galik (57) and Chairman Thomas Peterffy (79) might soon start thinking about who will succeed them.

Although no names are known yet, the company has a great track record of keeping people inside the firm for a long time and preparing them for further roles.

6. Does the company have a healthy balance sheet?

We look at three ratios to determine the healthiness of Interactive Brokers’ balance sheet:

• Interest Coverage: / (Interest Coverage > 15x? 🤷‍♀️)

• Net Debt/FCF: Net Cash Position equal to 43.6% (!) of Total Assets (Net Debt/FCF < 4x? ✅)

• Goodwill/Assets: 0% (Goodwill/Assets not too large? < 20% ✅)

Interactive Brokers has a very healthy balance sheet.

7. Does the company need a lot of capital to operate?

We prefer to invest in companies with CAPEX/Sales lower than 5% and CAPEX/Operating Cash Flow lower than 25%.

Interactive Brokers:

• CAPEX/Revenue: 0.9% (CAPEX/Sales < 5%? ✅)

• CAPEX/Operating Cash Flow: 0.6% (CAPEX/Operating CF? < 25% ✅)

As you can see, Interactive Brokers has a very low capital intensity.

Why is the CAPEX/Operating Cash Flow so close to the CAPEX/Revenue? Are Sales and Operating Cash Flow virtually the same?

Yes. This is because increases in client cash reserves are seen as operating cash flows.

Every time a client deposits money into their Interactive Brokers account, the company boosts its operating cash flow..

It compensates for all costs that are deducted from revenue to obtain profits.

8. Is the company a great capital allocator?

Capital allocation is the most important task of management.

Look for companies that invest shareholders' money at attractive rates of return.

Interactive Brokers:

• Return On Equity (ROE): 4.9% (ROE > 20%? ❌)

• Return On Invested Capital (ROIC): 22.4% (ROIC > 15%? ✅)

Interactive Brokers seems to be operating at a very attractive ROIC.

9. How profitable is the company?

The higher the profitability of the company, the better.

Here’s what things look like for Interactive Brokers:

• Gross Margin: 90.7% (Gross Margin > 40%? ✅)

• Net Profit Margin: 14.5% (Net Profit Margin > 10%? ✅)

Interactive Brokers’ profitability looks very attractive. They have a very scalable business model.

10. Does the company use a lot of Stock-Based compensation?

Stock-based compensation is a cost for shareholders and should be treated accordingly.

Preferably, we want SBCs as a % of Net Income to be lower than 4% and certainly below 10%.

Interactive Brokers:

• SBCs as a % of Net Income: 15.2% (SBCs/Net Income < 10%? ❌)

• Avg. SBC as a % of Net Income past 5 years: 32.5% (SBCs/Net Income < 10%? ❌)

Interactive Brokers uses a lot of Stock-Based Compensation. We will treat this as a cost in our valuation model.

11. Did the company grow at attractive rates in the past?

We look for companies that managed to grow their revenue and EPS by at least 5% and 7% per year, respectively.

Interactive Brokers:

• Revenue Growth past 5 years (CAGR): 22.0% (Revenue growth > 5%? ✅)

• Revenue Growth past 10 years (CAGR): 15.8% (Revenue growth > 5%? ✅)

• EPS Growth past 5 years (CAGR): 28.6% (EPS growth > 7%? ✅)

• EPS Growth past 10 years (CAGR): 24.6% (EPS growth > 7%? ✅)

These growth figures look attractive.

Another positive? The number of client accounts has been growing at a CAGR of 23% since 2008.

12. Does the future look bright?

You want to invest in companies that manage to grow at attractive rates, as stock prices tend to follow FCF per share growth over time.

Interactive Brokers:

• Exp. Revenue Growth next 2 years (CAGR): 5.1% (Revenue growth > 5%? ✅)

• Exp. EPS Growth next 2 years (CAGR): 5.7% (EPS growth > 7%? ❌)

• EPS Long-Term Growth Estimate: 10.5% (EPS growth > 7%? ✅)

13. Does the company trade at a fair valuation level?

We always use 3 methods to look at the valuation of a company:

• A comparison of the forward P/E multiple with its historical average

• Earnings Growth Model

• Reverse Discounted-Cash Flow

A comparison of the multiple with the historical average

The first thing we do is compare the current forward PE with its historical average.

Today, Interactive Brokers trades at a Forward PE of 22.0, the same as its 10-year average.

Earnings Growth Model

This model shows you the yearly return you can expect as an investor.

In theory, it’s easy to calculate your expected return:

Here are the assumptions I use:

• Earnings per Share Growth: 12.0% per year over the next 10 years

• Dividend yield: 0.5%

• Forward PE to remain flat

Expected yearly return = 12.0% + 0.5% + 0.0% = 12.5%

Reverse DCF

Charlie Munger once said that if you want to find the solution to a complex problem, you should invert. Always invert. Turn the problem upside down.

A reverse DCF shows you the expectations implied in the current stock price.

You try to determine for yourself whether these expectations are realistic or not.

You can learn more about a reverse DCF here: Reverse DCF 101.

For this model, we should use Net Income instead of Free Cash Flow, as client cash reserves are wrongfully taken into account for the Free Cash Flow.

The expected Net Income of the next 12 months equals $755 million.

We subtract the Stock-Based Compensation ($122 million) to arrive at FCF in year 1 of $721.5 million.

Today, IBKR has 108.9 million shares outstanding.

Under these assumptions, our Reverse DCF indicates that Interactive Brokers should grow its Net Income by 12.9% per year to return 10% per year to shareholders.

Interactive Brokers:

• Forward PE: 22.0x (lower than its 5-year average? < 22.0x? 🤷‍♀️)

• Earnings Growth Model: 12.5% (Yearly return > 10%? ✅)

• Net Income Growth Reverse DCF: 12.9% (Realistic growth expectations? 🤷‍♀️)

14. How did the Owner’s earnings of the company evolve in the past?

Over time, stock prices usually follow the growth in a company's Owner’s Earnings (EPS Growth + Dividend Yield).

That’s why we want to invest in companies that managed to grow their Owner’s Earnings at attractive rates in the past.

This is the case for Interactive Brokers:

• CAGR Owner’s Earnings (5 years): 29.3% (CAGR Owner’s Earnings > 12%? ✅)

• CAGR Owner’s Earnings (10 years): 25.1% (CAGR Owner’s Earnings > 12%? ✅)

15. Did the company create a lot of shareholder value in the past?

We want to invest in companies that have compounded at attractive rates in the past.

Ideally, the company has returned more than 12% per year to shareholders since its IPO.

Here’s what the performance of Interactive Brokers looks like:

• YTD: -13.5%

• 5-year CAGR: +28.8%

• CAGR since IPO (2007): +11.4% (CAGR since IPO > 12%? ❌)

The main reason IBKR hasn’t returned more than 12% per year since their IPO?

After the IPO in 2007, the share price needed a lot of time to recover from the 2008 Big Financial Crisis, only reaching its IPO level in 2015.

Since then, the stock has been picked up again, performing well above the market’s return.

Quality score

Finally, let’s bring everyhing together and give Interactive Brokers a Total Quality Score.

Read more

A €10,000 investment in 1995 would be worth €500,000 today!

Let’s tell you why I think this company is so interesting.

Why Private Equity?

Owning a Private Equity (PE) company in your portfolio could be very interesting. Why?

There are two main reasons:

1. It’s hard to get access to Private Equity as a private investor. Via a listed private equity firm, you can get access to smaller amounts of money

2. In the very long term, Private Equity performs even better than stocks

Investing in private equity lets you invest in companies that most people can't invest in.

These are usually private companies, not listed on the stock market.

It's a way to be part of big business deals that aren't open to everyone.

Our Next Buy is a PE company highly specialized in software and technology.

What’s also important to understand? By investing in a Private Equity firm, you optimally benefit from the power of compounding.

Let’s say:

• A PE firm has $1 billion in Assets Under Management (AUM)

• The unlisted equities return 10% per year on average

• They collect 1% in yearly fees

In year 1, they make $10 million from fees.

By year 10, the private equity (PE) firm will manage around $2.6 billion.

That means they’ll earn about $26 million in fees every year by then.

When you combine this with a yearly extra inflow (clients investing in the funds of the company), you understand that PE firms can be very powerful compounding machines.

It’s exactly why most Private Equity firms have a very strong track record in creating shareholder value.

A Proven Wealth Builder

If you had invested in this company at its IPO in 1995, you’d be up 50x.

Over the last 10 years, the company has compounded its Owner’s Earnings at a 20.0% CAGR.

This is what great capital allocators do: They reinvest wisely, avoid stupidity, and let compounding do the heavy lifting.

Let’s find out which company I’m buying on Monday…

Read more

Your investment thesis isn't longer intact

Today it’s time to sell a stock in Our Portfolio.

It’s the second stock we ever sold. The proceeds will be used to buy a new company.

Subscribe now

Reasons To Sell a Stock

Selling a stock can be very dangerous.

Why?

A stock can decline only 100%, but the upside potential is unlimited.

The biggest investment mistake I ever made?

Selling my winners too soon.

Just imagine you sold Monster Beverage for $0.01 in 1987 or Apple for $0.3 in 1991.

Since their IPO, both stocks are up 72,000% and 85,000%, respectively.

The secret of successful investing is to let the magic of compounding work for you as long as possible.

It is not without reason that compound interest has been called the eighth wonder of the world.

In the past, I wrote an article with 7 reasons to sell a stock.

Here they are:

1. You made a mistake

2. You’ve found a better opportunity

3. The company is losing its moat

4. The stock is (dramatically) overvalued

5. Change in management

6. Growth is slowing down

7. You need cash

I think there are 4 points in our investment case that aren’t intact anymore:

• I made a mistake: The company is less strong than I initially thought

• I’ve found a better opportunity: the proceeds will be used to buy another company with a better outlook

• The company is losing its moat: The competitive landscape is becoming more and more intense

• Growth is slowing down: The business evolved from a growth company to a cheap Cannibal Stock

Which company are you selling?

Read more

We love declining markets as we can buy wonderful companies at cheaper prices.

Let’s create Our Shopping List. Which companies would we like to buy when the market tanks?

Trump Tariffs

The reason for the market volatility?

Trump added new taxes on goods from Canada, Mexico, and China. He also states tariffs on the EU will be announced soon.

These countries fought back by adding their own taxes. This made things more expensive and uncertain for businesses.

The key thing to remember? Nobody wins in a (trade) war.

"In war, whichever side may call itself the victor, there are no winners, but all are losers." - Neville Chamberlain (Prime Minister of Great Britain during WOI)

What will happen next?

What will happen next? The market will fluctuate.

Please note that from a stock market perspective, nothing happened yet.

The S&P 500 declined by 3.3% this week and we’re down only 1.7% since the beginning of the year.

It’s still way too soon to heavily start adding to your positions.

However, great things happen to those who prepare themselves.

Just look at what happened in 2020. During the COVID uncertainty, the S&P 500 declined by 34%.

If you bought these stocks at the exact bottom you’d have:

• Arista Networks: +730%

• Intuitive Surgical: +324%

• Constellation Software: +311%

• Copart: +260%

• Brown & Brown: +254%

Please note that buying stocks at the exact bottom of a declining market is impossible.

However, you get the point: the best time to buy stocks is when there’s blood running through the streets.

There’s always an intelligent sounding reason to sell.

But in the end owning stocks is one of the best ways to create wealth:

Declines are good

Stock market declines are good (and healthy).

Once traditional media starts talking about stock market crashes, it’s usually a great time to add to some of your positions.

But please don’t take my word for it.

Let’s listen to Warren Buffett, the best investor in the world.

Just imagine you love hamburgers and eat one at least once a week.
If the price goes up, you wouldn’t be happy. Do you?

Stocks are just like hamburgers. They work exactly the same way. 

Many people are happy when prices go up. But if you are a serious investor and you want to keep compounding your money over the next few years or even decades, lower stock prices are the greatest thing you could wish for.

You still need some extra convincing?

In the long term, stock prices always go up.

If you invested $1 in 1800, you'd have over $20 million (!) today.

It’s a great idea to add to your positions in times of uncertainty:

"It’s absolute cockamamie crazy to sell stocks after they drop. Instead, you should say, “Today there’s a first-rate bargain and I’m buying.” — Charles Ellis

"I’ve found that when the market’s going down and you buy stocks wisely, at some point in the future you will be happy." — Peter Lynch

"After a stock market decline, people may perceive more risk than before when, in fact, the decline may have taken some of the risks out of the market." — Robert Shiller 

The power of the Community

I think the Community is something very powerful during times of turmoil.

It helps to focus on the long term and to do the right thing.

I love that when stocks go down, Partners don’t panic. Instead, they buy more at lower prices.

This caused some Partners to:

• Pick up Dino Polska in September 2024: +60%

• Buy Fortinet in November 2023: +110%

As Napoleon Bonaparte once said: A genius is the man who can do the average when everyone else around him is losing his mind.

Our Shopping List

Now let’s create Our Shopping List.

It’s a list of phenomenal quality stocks we would love to buy at the right price.

For every company, we add a price at which I would be interested in buying.

An example?

Copart is a business I would love to own. However, I think the valuation is currently too expensive.

• Current stock price: $53.7

• Forward PE: 35.8x

• Average Forward PE past 10 years: 26,9x

This means the stock should decline by 25%. As a result, we put our ‘Buy Under Price’ at $40.8.

We do this exercise for our entire shopping list (29 High-Quality Stocks).

Here’s the list:

Read more

There are a few reasons for this:

1. Disappointing trial results

2. Increased competition

3. Pricing pressures & regulatory challenges

Is the decline justified? Or is this the opportunity of a century?

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Onepager

Here’s a onepager with the essentials of Novo Nordisk:

(Click on the picture to expand)

How does Novo Nordisk make money?

Novo Nordisk is a global pharmaceutical company engaged in diabetes and obesity care. Furthermore, they are also active in other rare diseases and cardiovascular medicine.

The company focuses on discovering, developing, and manufacturing innovative drugs globally.

Over the years, the Danish company has built a strong track record. In 2023, Novo Noridsk celebrated its 100th (!) birthday.

Currently, Novo Nordisk’s main source of income comes from products that help with obesity and diabetes.

They offer two unique products:

• Ozempic for diabetes care

• Wegovy for obesity care

Both Ozempic and Wegovy are protected by a patent based on semaglutide.

Semaglutide is a medicine that helps people with type 2 diabetes and those trying to lose weight.

It works by copying a natural hormone in your body that controls blood sugar and reduces hunger.

Do you want to learn more about the business model of Novo Nordisk? You can find a Not So Deep Dive here.

Successful Track Record

Novo Nordisk has been very successful in the past.

Since 2001, the stock increased 50x.

This means $10,000 turned into $500,000:

Together with Eli Lilly, they dominate the entire market.

Both companies are mainly active in the obesity and diabetes treatment market.

The World Health Organization indicates that 1 out of 8 people in the world suffer from obesity.

This means Novo Nordisk has 1 billion (!) potential customers.

The diabetes care market should grow by almost 8% annually until 2030. This results in plenty of growth opportunities.

Analysts expect Novo Nordisk to grow its EPS by over 15% per year over the next few years.

And yet… The stock declined by almost 40% recently.

What’s going on?

There are three main reasons why Novo Nordisk is down:

1. Disappointing trial results CagriSema

2. Increased competition

3. Pricing pressures & regulatory challenges

1. Disappointing trial results CagriSema

In December 2024, Novo Nordisk published trial results for its obesity drug CagriSema.

The trial demonstrated an average weight loss of 22.7% over 68 weeks for participants on CagriSema.

This number is statistically significant, but it fell short of Novo's anticipated 25% target.

The results of the trial raised concerns about whether Eli Lilly’s obesity drug (Zepbound) might be better than the one of Novo Nordisk.

On this news, the stock dropped by 27%, erasing $125 billion in market value.

It was the largest one-day decline for Novo Nordisk ever.

2. Increased competition

Rival companies such as Hims & Hers ($HIMS) have intensified their marketing efforts.

You might have seen their advertisements during the recent Super Bowl.

The increased competition in the GLP-1 weight-loss drug market impacted Novo Nordisk’s market share and investor confidence.

3. Pricing pressures & regulatory challenges

The Inflation Reduction Act (IRA) in the US aims to reduce the costs of Medicare*. The measures needed would become effective from 2027.

This may impact the profitability of Novo Nordisk’s main products Ozempic and Wegovy.

*Medicare is a U.S. government health insurance program primarily for people aged 65 and older, as well as some younger individuals with disabilities.

Next to pricing pressures, the Danish company faces regulatory challenges regarding the safety and manufacturing of its products.

The U.S. Food and Drug Administration (FDA) found problems at the company after an inspection in March 2024.

At the same time, the European Medicines Agency is looking into studies that suggest Ozempic might be linked to a rare eye disease called NAION.

Novo Nordisk says its products are safe. But these investigations could change how people see the drug and how rules are made.

Drawdown

As a result of these things, Novo Nordisk is down 39% from it’s 52-week high:

This is one of the largest drawdowns Novo Nordisk has ever experienced.

Now let’s dive into the valuation to find out whether this offers buying opportunities.

Valuation

We always use three methods to look at the valuation of a company:

• A comparison of the Forward PE multiple with its historical average

• Earnings Growth Model

• Reverse Discounted-Cash Flow

A comparison of the Forward PE multiple with its historical average

The first thing we do is compare the current forward PE with its historical average over the past 5 years.

This is a shortsighted method but it already gives a quick indication.

Today, Novo Nordisk trades at a forward PE of 21.4x compared to a historical average of 28.7x.

In other words: Novo Nordisk looks cheap.

Earnings Growth Model

This model shows you the yearly return you can expect as an investor.

You can explore more about the Earnings Growth Model here.

Here are the assumptions I use:

• EPS growth: 12.0% per year over the next 10 years

• Dividend Yield: 2.0%

• Forward PE to decline from 21.4x to 20.0x

An expected yearly return of 13.3% per year sounds attractive.

Reverse DCF

Charlie Munger once said that if you want to find a solution to a complex problem, you should invert. Turn the problem upside down.

This is exactly what a reverse DCF does. As an investor, we don’t make assumptions. We simply look at what assumptions the market has made and see whether they are reasonable.

Learn how to do a Reverse DCF yourself here.

The expected Free Cash Flow of the next 12 months equals DKK 90.1 billion.

We subtract the Stock-Based Compensation (DKK 2.3 billion) and add Growth CAPEX (DKK 39.8 billion) to arrive at FCF in year 1 of DKK 127.6 billion.

The reverse DCF indicates that Novo's FCF should grow by 9.5% each year for the next ten years.

These growth estimations sound more than reasonable.

Novo Nordisk:

• Forward PE: 21.4x (lower than its 5-year average? < 28.7x? ✅)

• Earnings Growth Model: 13.3% (Yearly return? < 10%? ✅)

• FCF-Growth Reverse DCF: 9.5% (Realistic growth expectations? ✅)

My Take

Novo Nordisk experienced one of its largest stock price declines ever.

But is this a golden opportunity to buy the stock? Here’s my take…

Read more

This company may get what it takes to do the same.

Is it Our Next Buy? Let’s find out.

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Dream Finders Home - Doubling every 2 years

Dream Finders Home is a homebuilder you need to know about.

It’s growing fast. Insiders own 70.3% (!) of the company. And the founder is still running t…

Read more

New stock ideas are posted every single day in Our Community.

And that’s why Our Stock Picking Contest is so much fun.

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Over the years, many of you have expressed interest in this, so I’m exploring the idea of launching an investment fund grounded in the principles I’ve consistently shared with you.

To better understand your interest and potential involvement, I’ve put together a quick survey.

Curious to learn more? Complete the survey to stay informed about the next steps (minimal entry amount: $250,000).

I might be interested

Top Pick Partners Last Year

In December 2023, we launched a competition for Our Partners.

Everyone had the opportunity to pick their 3 favorite stocks for 2024.

Over 300 companies were chosen.

Some Partners reported incredible returns.

1. Ken Yamakawa: +123.4%

2. Shams J: +111.3%

3. Mike H: +80.9%

These returns are phenomenal. Therefore, I want to reward them.

• Ken Yamakawa: A subscription for 2 years on Compounding Quality

• Shams J: A 1-year subscription to Compounding Quality

• Mike H: A signed book copy of The Art of Quality Investing

But which picks stood out in 2024?

Here are the best-performing stock picks of our Partners for 2024.

Let’s dive right in.

10. Lemonade ($LMND)

Company Profile

Lemonade is an insurance company that offers home, apartment, pets, and life insurance coverage.

Instead of filling out lots of paperwork, you can sign up for insurance using their app or website in just a few minutes.

They use artificial intelligence (AI) to help process claims quickly, sometimes in just a few seconds.

Lemonade gives leftover money (that’s not used for claims) to charities you choose.

Investment Rationale

• Disruptive approach to the traditional insurance industry

• Amazing growth: 5-year Revenue CAGR: 57.0%

• Net Cash Position equal to 10.9% of the Market Cap

Stock Performance 2024: +127.4%

9. Axon Enterprise ($AXON)

Company Profile

Axon makes tools to help the police and public safety workers.

They are best known for making TASER devices. These are non-lethal tools used by police to stop dangerous situations without seriously hurting anyone.

Axon also makes body cameras that officers wear to record what happens during their work.

The police can store these recordings using Axon software. This efficiently organizes all collected evidence.

Investment Rationale

• Network effects: As more police use Axon’s software, it gets more valuable

• Founder Patrick Smith is still the CEO

• Axon returned 33.3% (!) per year to shareholders since 2001

Stock Performance 2024: +130.1%

8. Synektik ($SYN)

Company Profile

Synektik creates special medicines called radiopharmaceuticals Their products help doctors see inside the body to find diseases like cancer.

They also make and sell advanced medical equipment, including robots that assist in surgeries. This makes operations less invasive and helps patients recover faster.

One of their most important products? Da Vinci robots. These machines assist doctors in performing precise and minimally invasive surgeries.

Synektik has exclusive rights to distribute da Vinci robots in Poland, the Czech Republic, and Slovakia until 2030.

Investment Rationale

• Excellent capital allocation (ROIC: 20.3%)

• Insider ownership: 51.6% of total shares outstanding

• Long-term estimated EPS-Growth: 15.2%

Stock Performance 2024: +130.9%

7. TerraVest Industries ($TVK)

Company Profile

Terravest Industries is a serial acquirer in niche manufacturing markets.

They own companies in fields like energy, transportation, and industrial equipment.

Terravest helps these companies improve by providing them with resources and guidance. They look for opportunities to make these businesses more efficient and profitable.

PS Do you want to learn more about serial acquirers? Read this article.

Investment Rationale

• Still a long runway ahead

• Serial acquirers outperform the market in the long run on average

• CAGR of the stock since IPO in 2012: 42.8%

Stock Performance 2024: +152.7%

6. Pro Medicus ($PME)

Company Profile

Pro Medicus makes advanced software for doctors and hospitals to look at medical images, like X-rays, MRIs, and CT scans, on computers.

Their main product helps doctors quickly see and analyze these images so they can figure out what’s wrong with a patient faster.

They use artificial intelligence (AI) to spot problems that might be hard for doctors to notice.

Pro Medicus also makes it easy for doctors to share these images with other specialists around the world. This saves time and helps patients get the right treatment more quickly.

Investment Rationale

• Excellent capital allocation (ROIC: 93.3%)

• The two co-founders still own 46% of the business

• The intrinsic value (Owner’s Earnings) doubled every 2 years for the last 10 years

Stock Performance 2024: +161.0%

5. Sea Ltd ($SE)

Company Profile

Sea Ltd is a tech company from Singapore.

They operate in 3 segments:

1. Garena - A gaming platform: They make popular games like Free Fire and also let people play and connect online.

2. Shopee - An online shopping app: Allows you to buy everything from clothes to electronics and have it delivered to your door.

3. SeaMoney - Payment Service: Helps people pay for things online or send money to others, like a digital wallet.

Investment Rationale

• Sea Ltd is likely to profit from the growing middle class in Asia

• Strong diversification across business lines

• Amazing growth: 5-year Revenue CAGR: 55.9%

Stock Performance 2024: +162.0%

4. Nvidia ($NVDA)

Company Profile

Of course, Nvidia is part of this list.

Nvidia makes super-powerful computer chips called GPUs (graphics processing units).

These help computers create amazing visuals and run complicated programs. GPUs are mostly used for gaming, making video games look realistic and run smoothly.

Besides AI, GPUs are mostly used for gaming. Nvidia makes video games look realistic and run smoothly.

When you use ChatGPT, play video games, or run complex programs, chances are Nvidia is speeding up the process.

PS We wrote a Not So Deep Dive about Nvidia. You can read it here.

Investment Rationale

• Founder Jen-Hsun Huang is an excellent CEO

• There is no good alternative for Nvidia’s GPU

• Exceptional profitability (Gross Margin: 75.9%)

Stock Performance 2024: +171.2%

Now let’s dive into the Top 3.

Read more

Here’s what a $10,000 investment would have given you since 1990:

• S&P 500: $288,000

• Berkshire Hathaway: $795,000

• Heico: $8,563,000

Did you miss the flight? Let’s find out.

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Heico - General Information

• 👔 Company name: Heico

• ✍️ ISIN: US4228061093

• 🔎 Ticker: HEI

• 📚 Type: Owner-Operator

• 📈 Stock Price: $228

• 💵 Market cap: $27.7 Billion

• 📊 Average daily volume: $137 Million

Onepager

Here’s a onepager with the essentials of Heico

Many of you have asked about this, so I’m considering launching an investment fund based on the principles I’ve shared with you over the years. 

To gauge interest and understand potential investments from my readers and followers, I’ve created a short survey. 

Might you be interested? Fill in this survey to be kept up to date.

Survey Equity Fund

15-Step Approach

Now let’s use our 15-step approach to analyze the company.

At the end of this article, we’ll give Heico a score on each of these 15 metrics.

This results in a Total Quality Score.

1. Do I understand the business model?

At any given moment, roughly 10,000 planes are soaring through the sky.

You have likely been on one this year, which means you have been in contact with Heico.

Heico ensures planes and spacecraft stay in the air by providing vital replacement parts. They are a clear leader in a niche market.

Their product line includes more than 14,000 parts, including engine components, cooling system components, and brake pads.

But there’s more.

They currently own 98 subsidiaries operating in niche segments of aviation, defense, space, medical, telecommunications, and electronics.

That makes Heico a serial acquirer.

Serial acquirers can offer great benefits:

(If you’re interested in learning more about serial acquirers, click here)

Heico usually buys 80% of the subsidiaries to keep the ownership mindset alive.

They operate in two segments:

• The Flight Support Group (68.1%) makes and repairs aircraft parts for commercial, military, and business planes

• The Electronics Technologies Group (28.9%) makes and sells advanced electronics for aviation, defense, and other industries

2. Is management capable?

Given the importance of the acquisitions to Heico's growth, we need an exceptional capital allocator at the helm.

In other words, we want people to pay the price for making wrong acquisitions.

This is certainly the case for Heico.

The Mendelson family took control of the company in 1990.

Today, they are still active and hold 16.6% of the shares. For the Mendelsons, Heico isn’t just a business, it’s family wealth. That’s like music to my ears. Why you may ask?

Family-run businesses focus on long-term value creation.

Since the Mendelsons took over, Heico has generated a total return of roughly 82,000% (CAGR = 22%). Before them, the CAGR was only 3.2%. It looks like they are doing something right.

But the most impressive part? 400 (!) employees of Heico own more than $1 million worth of Heico stock. That’s roughly 4.5% of all employees.

The conclusion? Heico is a great example of an Owner-Operator.

"The stock has turned a lot of ordinary Heiconians, especially early staffers, into millionaires. No, that’s incorrect, multimillionaires.” - Larry Mendelson

3. Does the company have a sustainable competitive advantage?

Heico has a strong moat.

Airlines love them because Heico’s parts are cheaper than the original manufacturers’ but work just as well.

This sounds too good to be true, right?

It isn’t! Heico is lazy and very smart at the same time.

The Mendelsons saw an opportunity to expand the product line by reverse engineering existing parts. This clever move saved them from expensive R&D, making them the lowest-cost producer.

Thanks to tough regulations, their moat is even stronger. FAA (Federal Aviation Administration) approval can take years, as safety is the priority. An airline buying cheaper parts from unknown manufacturers invites disaster.

Companies with a sustainable competitive advantage are often characterized by the following:

• Gross Margin: 38.9% (Gross Margin > 40%? ❌)

• Return On Invested Capital without Goodwill (ROIC:) 10.0% (ROIC > 15%? ❌)

At first sight, the Gross Margin and ROIC don’t look attractive.

We will dive into this later in this article.

4. Is the company attractive in an interesting end market?`

Serial acquirers are great at turning money into more money.

Why? There are three big reasons:

• There are a lot of new opportunities to invest in

• They have smart leaders who know exactly how to use capital

• Dual growth engines create more Free Cash Flow (organic growth and new acquisitions)

But there’s more to it with Heico.

Their specific businesses operate in a great spot because of some exciting trends:

• Unfortunately, the world isn’t getting much safer

• What is the first thing that people do when they become more wealthy? Traveling

The aviation industry is expected to grow at a CAGR of 4.4%, while the defense industry is expected to grow at a CAGR of 9.8%.

These are attractive growth rates.

5. What are the main risks for the company?

Howard Marks once told the following:

"A gambler bet everything on a race with only one horse. Confident he'd win, he watched as the race began. Halfway through, the horse jumped the fence."

The lesson? In investing, there’s no such thing as certainty.

Like any business, Heico faces risks:

• If the business gets larger, small acquisitions don’t move the needle anymore

• High dependence on the Mendelsons

• Lack of good reinvestment opportunities

• Not being able to get certain parts from the OEMs (Original Equipment Manufacturers) could hurt the performance

• OEMs could develop patents or methods that block Heico from making replacement parts

• A failure of a part in a plane could cause massive reputation damage

• Rich valuation levels (see later)

Serial acquirers counteract some risks by great diversified cash flow streams:

If you break one of the 98 legs off a table, the table will still stand straight. Heico has 98 different revenue streams from its subsidiaries.

6. Does the company have a healthy balance sheet?

We look at three ratios to determine the healthiness of the balance sheet:

• Interest coverage: 5.2x (Interest Coverage > 15x? ❌)

• Net Debt/FCF: 3.7x (Net Debt/FCF < 4x? ✅)

• Goodwill/Assets: 44.4% (Goodwill to assets < 20%? ❌)

The balance sheet doesn’t look ideal. But there are some important nuances:

• The interest coverage isn’t so worrisome as Heico has predictable revenue streams

• Given the many acquisitions, higher goodwill is normal

7. Does the company need a lot of capital to operate?

The less capital a business needs to operate, the better

Here’s what things look like for Heico:

• CAPEX/Sales: 1.5% (CAPEX/Sales? < 5%? ✅)

• CAPEX/Operating cash flow: 9.3% (CAPEX/Operating CF? < 25%? ✅)

It’s great seeing Heico is so capital-light. That means that there is a lot of cash available for new acquisitions.

Now let’s dive into the most important fundamentals of the company.

Read more