Thread by @hkeskiva

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Great companies come in different forms, but few, if any, check all the marks of perfection.

In this thread, we take a look at the CHARACTERISTICS OF A PERFECT COMPANY, using public companies as examples. Each is used as an example only once.

Best enjoyed with a cup of 🫖

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Perfect company is easy to understand, even by a child. As Terry Smith would say, there’s “no gibbledigoo”.

It makes money selling hamburgers (Shake Shack $SHAK), brewing beer (Boston Beer $SAM), or manufacturing lubricants (WD-40 $WDFC).

Sometimes less is more.

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Perfect company operates in a business with high margins. It can take a hit or two and still post healthy profit after operating expenses and future investments.

For example, Visa $V has gross margins of 80%, operating margins of 60% and net margins of 50%.

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Perfect company is founder-led. Studies show they make bold investments, are more innovative and yield better results – they’ve got skin in the game and aligned interests.

For example, 37yo Mark Zuckerberg still owns ~30% Facebook $FB and has majority voting control.

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Perfect company scales well. As it grows, its expenses hardly move resulting in ever-increasing profitability.

A case of Verisign $VRSN from Considering Stocks (amazon.com/dp/B08QLY97CN).

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Perfect company enjoys a fabulous market share with its superior product.

For example, Google $GOOGL enjoys a more than 90% market share of global search engine market, bing and Yahoo! being left in the dust.

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Perfect company has a natural monopoly in a business where overlapping activities make little to no sense.

For example, railroad companies like Union Pacific $UNP and Kansas City Southern $KSU operate railroad networks that keep competition at bay.

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Perfect company has an honest and frank leadership. They speak the truth and treat shareholders with respect, educating them at every turn when needed.

Here’s how Berkshire Hathaway $BRK warned about overvaluation of their own shares.

https://twitter.com/hkeskiva/status/1365179285930008578?s=20

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Perfect company focuses on long-term cash flows over short-term accounting fairy profits.

A living testament of this principle is Amazon $AMZN and its thinking around Day 1, beautifully laid out in their shareholder letters.

The first from 1997: s2.q4cdn.com/299287126/file…

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Perfect company has an iron-clad balance sheet. Shutdowns of the whole economy, like with covid in 2020, are nowhere near putting the company financials at risk.

Take Apple $AAPL that in 2020 had nearly $100B of net cash, generating another +$70B more over the year.

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Perfect company enjoys network effects proving difficult for competition to replicate overnight.

Take Mastercard $MA that has an enduring relationship with its customers and merchants. Its cards or devices can be used at nearly 500,000 merchant locations.

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Perfect company requires little to no capital from its owners, instead its funded by its business model.

In accounting terms, it is able to run with low or even negative working capital like Walmart $WMT. It gets money from customers before it pays its suppliers.

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Perfect company can grow for a long time before hitting the limits of the market.

In a blogpost (abovethecrowd.com/2014/07/11/how…) @bgurley estimated $UBER total addressable market worth $450-$1,300B. This provides ample opportunities to continue reinvesting in the business.

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Perfect company has a sticky business model that's not easily replaceable.

Voice-control technology provider Cerence $CRNC embeds itself deep into the car OEM processes through long sales cycles and integration work. Competition has hard time pushing them out of business.

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Perfect company is unpopular, even hated. It’s darling of no one and acquaintance of very few.

Low following presents attractive opportunities for investors finding it before others, just like with $XPEL that provided investors >100% ann. returns for a decade.

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Perfect company has a strong patent portfolio it can monetize, while prohibiting rivals entering the market with the same technology.

For example, Gentex $GNTX that manufactures auto-dimming rear-view mirrors, had > 1,300 patents and an impressive 93% market share.

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Perfect company has products I use myself. This is how I can keep track of the product development and possible challenges well before others.

For example, I’m exposed to Trimble $TRMB design software so I am in a good position to judge its benefits for domain experts.

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Perfect company is chronically fairly or attractively valued. This makes sure that investor or the company has ample opportunities to purchase shares from the bargain bin.

Take AutoZone $AZO that’s repurchased more than 80% of its shares, most of them with EV/EBIT 8-12.

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Did I miss something?

These were just the first characteristics of a perfect company and I'm happy to continue this list further.

If you liked this thread, please hit a follow @hkeskiva.

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For all my threads on business and investing, please make sure to check out this “meta-thread of threads”.

https://twitter.com/hkeskiva/status/1393471303890477056?s=20

Thanks for sticking with me this far. Have a nice weekend! 🙂🙏

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Perfect company has a vision I can relate to. It doesn't collide with my ethical beliefs and I feel at home owning it.

E.g. Swedish company $MIPS has an improved tech for helmets. Who wouldn't want to save lives with investing?



h/t @PeterHanninen

@PeterHanninen 22/🧵

Perfect company is able to recreate itself generation of products and services after another. This sustains high growth and keeps the company relevant.

For example, McDonald's $MCD has been able to find growth opportunities for 60 years and running.

h/t @clueless_1337