Thread by @BrianFeroldi

How to find quality businesses:

1)Recurring revenue

Types:

SaaS $TWLO
Platform $MELI
Tollbooth $MA
Razor/blade $ISRG
Subscription $NFLX
Consumables $SBUX
Financial services $MCO
Contracts $EPAM

Mental model:

2) Expanding moat:

Network effects: $FB
Switching costs: $ADBE
Durable Cost Advantage: $WMT
Intangibles:
+Premium Brand: $TIF
+Patent: $OLED
+Trade Secret: $KO
+License: $MCO

Mental model:

3) Organic growth

Core business expanding rapidly by grabbing share: $PAYC

vs.

Core business slow/no growth, top-line grows by acquisition only: $MIDD

4) Financial flexibility:

Amazingly strong balance sheet: $GOOGL ($109 BB cash / $4 BB LT debt)

or

some leverage but easily handled by operations: $AMT

5) Growing FCF/NI

Stock prices ALWAYS follow net income & fcf.......eventually.

Consistently up and to the right best.

Ex: $ADBE, $MA, $MA

6) Expanding margins:

Higher rev should = lower fixed costs per unit = profits grow faster than revenue

Results can be lumpy, but I watch Gross margin / Operating margin / profit margin (Net margin) over time

Ex: $BKNG, $PAYC

7) Optionality:

Ability to create new products/services that open up new markets.

@DavidGFool calls this "multiple futures"

Innovative companies win here.

Ex:
$TSLA - Telsa Energy
$AMZN - AWS
$NFLX - streaming

Forbes 100 most innovative companies = must read.

8) Great culture

Great cultures = great people = great products/services.

Use glassdoor.com / indeed.com for data.

"Best places to work" = top idea source

Ex: $HUBS, $DOCU, $ISRG

glassdoor.com/Award/Best-Pla…

9) Owner oriented management

Want CEO to care about the company/mission, not just prestige/paycheck.

Founders best.
Lifer employee 2nd best.
Frequent job hopper = worst.

Look for high insider ownership - they win/you win.

Ex:
@elonmusk Tesla
@JeffBezos Amazon
@jack Twitter

10) Huge Total Addressable Market (TAM)

Big markets = more room for growth.

Want company to have small % of the market.

Use company presentations/10k/3rd parties (@gartner) for data.

Ex:
$MDB TAM $64 BB (<1% captured)
$GLOB TAM $96 BB (<1%)
$TSLA TAM $15 TT (<1%)

Plenty of other factors to consider.

+Risks (outside forces like oil prices/interest rates, customer concentration, disruptive tech...)
+Dilution
+Valuation

etc....

My strategy:

find greatness/buy greatness/hold greatness

Great companies can underperform for extended periods.

Recent Ex:
$HQY
$ABMD
$PINS

I'm OK w/ that, so long as the company still great.