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  • Writer's pictureChris Mayer

The Best Businesses To Own

Some interesting things that have blown across my desk of late…

Sweden & Global Outperformers

Dede Eyesan of Jenga Investment Partners produced a study of stocks that returned 1,000% in the last decade. It’s titled “Global Outperformers.”

Sweden comes out looking good in this study.

Sweden produced 20 companies with a return of more than 1,000%, about 4.5% of the total population of outperformers, even though Sweden represents only 1.5% of the global capitalization (as defined in the study).

Sweden beat out much larger markets such as the UK, South Korea, Taiwan and Canada - all of which had market capitalization at least 2x that of Sweden’s.

China had 34 outperformers to Sweden’s 20, but China’s market is 12x the size of Sweden’s. Keep in mind, Sweden’s population is just 10 million.

In terms of number of outperformers, Sweden was 5th, beaten only by giants: US, India, China and Japan.

So, it’s a quite remarkable showing by the Swedes. You can peruse part of the table here:

There are obvious limitations to note here. The biggest one being that where a company is listed does not tell you where its largest markets are.

As Eyesan notes, for many outperformers in Asia and Europe the US is their largest source of revenue and profits. Among the Swedes, for example, Eyesan points to CellaVision, Invisio and Biotage as companies that derive more than one-third of their revenue from the US. If you adjusted this list by geographic source of revenues, you’d get a different look.

Even so, why does Sweden produce so many winners?

Eyesan has a few thoughts. He cites innovation as one factor:

  • “Sweden is the second most innovative country in the world according to the Global Innovation Index.

  • “Sweden has the highest R&D expenditure of a % of GDP in Europe

  • “Sweden has the ninth-best education system in the world”

I am a bit skeptical as to how much these things matter or even if it is possible to measure them. He also cites a focus on global growth among the Swedes. “It is common for Swedish startups to benchmark against global peers even in their early days,” writes Eyesan. And he points to government initiatives that encourage exports and international trade.

I have some of my own ideas as well, though they are anecdotal and not necessarily any better than Eyesan’s guesses. For one thing, there seems to be more attention paid to capital allocation (despite the widespread “dividend disease”) than I often find elsewhere. Many companies talk about, and even report, a number such as “return on capital employed.” There is good corporate governance, generally, with reasonable executive pay.

There is also a level of trust among the Swedes and a legal framework that allows for relatively easy, or more efficient, business combinations and transactions. All is to say, it seems like a good environment for business.

I have three Swedish companies in my portfolio. My own natural searching for winners led me to Sweden, not any top-down view of the country. As you probably know, the most recent addition, made last year, was Teqnion. I bought more this year. The company is performing well and has a very long runway. I also love the team; they are a special group of people. I am excited to be along for the journey.

Anyway, it’s sort of gratifying to see Sweden come out so well in this study. Or maybe it’s confirmation bias kicking in. Ha.

By the way, in looking over that table another country must jump out at you: India, with 20% of the winners and only 4.6% of the market.

Eyesan called India “the biggest surprise during our research.” India produced 91 outperformers. “To put things into perspective,” Eyesan writes, “India performed better than North and South America combined and was just two companies short of performing better than Europe.”

I won’t get into India here, but I encourage you to check out Eyesan’s report (it’s free):

Constellation Software and Private Competitors

My friends at In Practise (IP) have unveiled a new service they call “Enterprise,” which involves a deep look at companies through an analysis of their competitive position and culture and other factors. I am enjoying it so far and have learned some things it would’ve taken me quite a while to piece together on my own.

For example, one of the early reports covers Constellation Software. Without giving away the store, I believe I may be forgiven for sharing a nugget or two.

So, IP found 34 private vertical market software (VMS) consolidators. They are in a table with summary financial information and notes on deal size, geography and more. It’s fascinating to study this list. I think some of these will eventually find their way to the public markets. And there are certainly a few worth keeping an eye on.

Your first thought might be, “gee that’s a lot of competition.” What’s interesting, though, is how different the companies are that they wind up buying. IP estimates put Constellation’s typical acquisition at $3 million in median revenue and 0% organic growth acquired at 1x sales earning an ROIC of 30%. Private comps, by contrast, buy larger companies ($7m in median revenue), growing faster (5-10% organic growth) but they pay more (3-5x) sales and earn an ROIC of just 10%. But the private buyers also use leverage, often a lot of leverage.

IP sums up the differences in models this way:

“In short, the major difference is that the competitors are PE-backed, focused on acquiring faster growing VMS, and use leverage to juice ROE.”

The models are quite different and makes me think perhaps there isn’t as much competition as it may appear. There seems to be different ecologies within VMS. Anecdotally, I have heard private equity buyers say they never run into Constellation.

The private buyers must be knocking up against each other, but Constellation’s willingness to buy such small, unloved companies may still leave it without as much competition as it may seem. The bigger question is: Are there enough of these minnows out there for the increasingly large whale to swallow?

My research would lead me to answer “Yes.” There are new companies being created all the time. Moreover, the universe of VMS has been stretched to include companies that seem more service providers than purely software. Speaking with ex-Constellation hands, I gather there are over 100,000 companies that Constellation follows as potential targets. That puts the 134 companies it acquired last year in perspective.

Plus, Mark Leonard and his team may have found another gear: the ability to put large amounts of capital to work in carve-outs (see the Allscripts deal) and the ability to do larger deals in conjunction with a spinoff (see Lumine). Perhaps more of these deals is what Constellation 2.0 will look like.

(Disclosure: Woodlock House owns shares in Constellation Software, Topicus and Lumine).

For more on In Practise, visit their website here:

What Drives Investment Results?

There are many answers to this question. But I don’t think you can answer without asking, first, what’s your time horizon?

Related: Someone will say that “X stock is expensive” because it trades at a “high” multiple of earnings or cash flow. But my response is, usually, it depends on your time horizon. (And related to the time horizon question would be “what’s your hurdle rate?” or your required rate of return.)

I tweeted this, but thought I’d publish it here - in what I think is its original form:

Source: Twitter @Connor_Leonard (2019)

I love the chart and I may have to use it somewhere in my own presentations. I look to own companies for at least ten years. That’s my mindset going in. And that’s why I spend most of my time on the right side of this graphic: Understanding the people and the culture; getting a handle on incentives; and trying to figure out the reinvestment opportunities and the returns the company is likely to make on them.

I spend almost no time thinking about things like sentiment change or building a thesis around a change in multiple. Over a decade of ownership, those things don’t matter much. (Well, there are the twin engines of 100 baggers that I talk in the book. Sometimes you will be so fortunate as to find a stock that goes from a 10x multiple to 30x. That helps, but they are rare. Conversely, going from 30x to 10x is, uh, bad).

Price is important, but these items on the right are more important. If I don’t have those, I’m not interested even if the stock “looks cheap.” Besides, the importance of the price you paid is another thing that bleeds out over time.

Unless you really overpay big time, if you are right on the quality you’re going to do okay. If a stock is going to do 20x for you, then 30% more on the purchase price is not going to kill you. Even if you over-pay, you can still do well if you size it right and give yourself room to buy more later.

But you gotta be right about the business. And that’s why the bulk of my focus and research is on the right side of that chart.

The Best Business To Own

Warren Buffett said it best…

Over the years, my appreciation for the way Buffett succinctly encapsulates investing wisdom has grown. I saw a Tweet (apologies for forgetting who shared it) with the following Buffett quote: “the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return.”

I remember, thinking, “Gosh, that really does say everything.” The quote marinated in my brain for hours and then I finally decided to dig up the full context. It’s from Buffett’s 1992 shareholder letter:

“Growth benefits investors only when the business in point can invest at incremental returns that are enticing - in other words, only when each dollar used to finance the growth creates over a dollar of long-term market value. In the case of a low-return business requiring incremental funds, growth hurts the investor…

Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return. The worst business to own is one that must, or will, do the opposite - that is, consistently employ ever-greater amounts of capital at very low rates of return. Unfortunately, the first type of business is very hard to find: Most high-return businesses need relatively little capital. Shareholders of such a business usually will benefit if it pays out most of its earnings in dividends or makes significant stock repurchases.” [Bold added]


Berkshire Hathaway, 1992 Annual Letter

That’s the ballgame right there. My goal is to find companies that can do what Buffett says in bold. I think I’ve collected a world-class group of businesses, but time will tell!

I will not be in Omaha this year, though I have been many times. But I will be listening to the old sage via streaming. For all my friends who are going, enjoy!

Thanks for reading.


Published: April 24, 2023

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