Initial Buy Thesis for a Financial Company (June 2022)
When I am looking for a company to buy for the long-term it is important to me that the business is able to compound value over time. That compounding in value provides me a margin of safety in terms of “time.” Even if I’m early or overpay slightly today, simply holding on will usually bail me out.
The second criteria I like to see is that the compounding in value occurs at a rate faster than the average stock in the market. That’s the marker of a high-quality business that’s truly creating alpha for shareholders. This ‘quality’ dimension is built on sustainable growth advantages and returns on capital.
The third criteria, is a management that provides clarity on how they will manage their capital allocation policies. When a business generates cash that cash will be used to either create value or destroy value. An investor needs clarity on direction in order to make their own determination of what the likely result will be.
My final criteria is to buy a company with a below average price. It is rare for a stock to have all four of these criteria met. A company that meets the first 3 is likely to be too expensive to meet my final criteria. I like general hurdle limits like: “Never pay more than 15x earnings.” In today’s case, I have a company that I believe meets all 4 targets and the price is actually below a PE of 10. Let’s dive on in.