High Conviction: The Deep Moat Compounder
Demonstrated operating prowess meets industry tailwinds to form a business likely to compound for a long time to come.
Not investment advice: First, read my full disclaimer here.
Don’t tell me what you ‘like,’ tell me what you’re invested in…
Before any investment moves from a starter position (sub 1%) to a larger allocation, I make myself go through a checklist of sorts. This includes forming answers to the following questions:
Management: Are they strong operators? Allocators? Do I trust them?
Business: How well do I understand this business? What are the prospects for the industry? Is this a long-term investment or short-term trade? Do I have confidence in being able to predict performance? Over what time period?
Downside: How low is the floor?
Valuation: Is this an inexpensive valuation? How is that relative to global peers? Organic growth above/below the market and why? Who eats before me on the cap table and how does that impact downside?
Timing: What needs to go right for me to win? Mark this according to key milestones and check in periodically on the original thesis to make sure you’re not deluding yourself.
Why am I the lucky one?
Rarely do I feel strongly vindicated across the investment spectrum, 8/10 investments I’ll make have some known hair on them I get comfortable with (over time) for one reason or another.
To check these off in order, this is a:
Shareholder friendly management with demonstrated operational success.
A long-term investment that has significant tailwinds I think will continue for a long time. If this were a private opportunity, I would lock-up my investment over the next decade at current prices.
Net cash, capital light company that should be able to fund itself through internal cash generation.
A reasonable valuation much lower than larger (lower margin) peers. Organic growth that should see a double of the top/bottom line over the next 3-5 years.
Nothing spectacular needs to happen from the status quo despite a positive industry inflection. Book and execute 2-3 projects a year with at least one dropping down to a longer-term recurring operating stream.
Illiquid. Under-followed. Significant float is held by management. Sales cycle tends to lag the demonstrated forward momentum of the industry.
TLDR?
The company I am profiling today is one of my largest holdings. They have a world class service with limited competition, trade at an earnings yield over 10%, are net cash and have a management team I trust with significant skin in the game.
This is a high conviction, long-term position for me.
Management Check: I’ve spoken with the CEO and Chairman (2x).