We believe that over the long term, a company’s market value will reflect the fundamental value of the underlying business. This implies that above-average stock price performance should be the result of above-average growth in intrinsic value per share. While we believe that entry price is a critical factor in investment returns, our experience suggests that the primary drivers of long-term business value are largely qualitative in nature.
We focus our research on qualitative factors related to value creation at the business level, including competitive positioning; management talent and character; and growth opportunity. Our goal is to distill our investment universe down to what we believe are the most extraordinary businesses and concentrate our client capital in the subset of stocks that, in our estimation, have the highest total return potential. Ultimately, our research effort is intended to identify future “extreme winners” – the next generation of leading public companies – before their potential is realized in the marketplace.
Sustainable Competitive Advantages
Competitive forces dictate that most businesses fail to earn in excess of their cost of capital over extended periods. However, companies with durable and sustainable competitive advantages – which we refer to collectively as a “moat” that protects a business from competition – can avoid this fate through structural characteristics that preserve profitability. We thoroughly assess the sources of a company’s “moat” – including cost advantages, intangible assets, network effects, switching costs, and other factors – and the likelihood that they will persist over the long term.
Talented and Trustworthy Management Teams
We believe that exceptional people create and maintain exceptional companies. Our assessment of management extends beyond the obvious protections and alignment of interests that we require as passive, minority shareholders. We also look for integrity, operational excellence, capital allocation acumen, competitive drive, and an ability to win in a dynamic marketplace. In our portfolios, this often manifests in the form of founder/owner/operator-led companies.
Substantial and Underappreciated Growth Potential
We prefer to invest in businesses with ample opportunity to invest capital at high incremental rates of return. The ability to compound long-term earnings power is a primary contributor to intrinsic business value and is often overlooked by market participants with shorter time horizons. Our long-term orientation allows clients to benefit from underappreciated sources of growth within a business, including market share gains in large, core markets; expansion into adjacent or newly formed markets; commercialization of intellectual property; and execution of value-enhancing acquisitions. Traditional business valuation methodologies often fail to capture the full benefit of persistent competitive advantages coupled with reinvestment opportunities, thereby dramatically underestimating the future earnings power of the most exceptional companies. Therefore, we believe that it is possible, via a well-funded research effort, to gain a variant perception on the intrinsic value growth potential of a business based on a thorough assessment of pertinent qualitative attributes.