Chuck Akre's Three-Legged Stool is amazing.
It helps you find Compounding Machines.
Here are his 9 criteria to find Quality Companies:
It helps you find Compounding Machines.
Here are his 9 criteria to find Quality Companies:
1. Earn high returns on capital
Seek for companies with an ROIC > 15%.
A high ROIC with plenty of reinvestment opportunities is the dream of every investor.
Seek for companies with an ROIC > 15%.
A high ROIC with plenty of reinvestment opportunities is the dream of every investor.
2. Invest within your circle of competence
Only invest in what you understand.
If you don't understand what you buy, you won't know when it's a good time to sell either.
Only invest in what you understand.
If you don't understand what you buy, you won't know when it's a good time to sell either.
3. FCF > Earnings
Earnings are an opinion.
Cash Flow is a fact.
Earnings are an opinion.
Cash Flow is a fact.
4. Pricing power
Pricing power is the best protection against inflation for companies.
A high and consistent gross margin is a great indication that a company has pricing power.
Pricing power is the best protection against inflation for companies.
A high and consistent gross margin is a great indication that a company has pricing power.
5. Management is important
Management can make or break a company.
Look for companies where insiders invest heavily in their own company.
Management can make or break a company.
Look for companies where insiders invest heavily in their own company.
6. Predictable earnings
Invest in cash machines.
When earnings are predictable, you are able to make better predictions about the future.
Invest in cash machines.
When earnings are predictable, you are able to make better predictions about the future.
7. Governments shouldn't intervene
Avoid investing in companies wherein the government has a stake.
Also avoid companies where a change in regulation can harm the company.
Avoid investing in companies wherein the government has a stake.
Also avoid companies where a change in regulation can harm the company.
8. Low capital intensity
The best companies require very little capital to operate.
Seek for companies with CAPEX/Sales < 5%.
The best companies require very little capital to operate.
Seek for companies with CAPEX/Sales < 5%.
9. Focus on shareholder value
The track record of a stock already tells you a lot.
You don't want to invest in the next big thing. You want to invest in companies that have already won.
Seek for companies which managed to compound > 12% per year over the past decade.
The track record of a stock already tells you a lot.
You don't want to invest in the next big thing. You want to invest in companies that have already won.
Seek for companies which managed to compound > 12% per year over the past decade.
That's it for today.
If you liked this, you'll love all public writings of Chuck Akre.
You can download them on my website for free.
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If you liked this, you'll love all public writings of Chuck Akre.
You can download them on my website for free.
Sign up here to receive it: eepurl.com
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