5 Must-Read Papers for Quality Investors

It's crucial to concentrate on the foundational drivers and filter out superficial market noise

A 🧵 1️⃣ Balancing ROIC and Growth to Create Value (Tim Koller, McKinsey)

Through an examination of long-term patterns of growth and ROIC in large publicly listed US companies from 1965 to 1995, the study concludes that ROIC tends to remain stable over time, whereas growth is often fleeting and declines.

Key Lessons from Chuck Akre and Our Personal Insights

Akre's investment philosophy centers on identifying businesses with high potential for compounding returns over long periods, underpinned by his renowned "three-legged stool" framework.

A 🧵 Exceptional Business Models

Akre looks for companies with high returns on equity or capital, driven by a sustainable competitive advantage. This allows businesses to thrive in various economic environments.

Finding excellent capital allocators - what qualities separate elite performers from the average?

🧵on 5 criteria & McKinsey insights 1️⃣ Excess Cash - Now What?

Kicking at an open door: high return companies will eventually become flush with cash as exceptional growth isn’t sustainable. By exceptional, we mean 20-30% or more and with growth being funded internally. You could imagine a case where frequent equity raises allow you to grow strongly (with total growth exceeding the ROIIC), just as long as shareholders are willing to fund your growth strategy.

It's not inherently a negative sign if a company, particularly one with a high return on capital and moderate growth (e.g., mid-single digits), generates significant cash flow beyond its operational needs. In such scenarios, if the core business doesn't offer enough opportunities for substantially faster growth, pursuing unrelated ventures often leads to poor outcomes.

Free deep dive on our largest position

We thought it would be a good idea to release one of our previous deep dives to the public so you can get a sense of the type of content we offer at The Compounding Tortoise S-Stack.

So, we've just removed the paywall behind the September 2024 deep dive on Harvia $HARVIA, listed in Helsinki

The "Healing with the heat" money machine

A quick thread on the latest developments🧵 1⃣ Driving Gross Margin to Reinvest in OPEX

As the CEO pointed out:

We clearly understand that we can finance our growth initiatives through maintaining high enough growth margin. So it's really kind of balancing both of these top line and profitability and clearly our goal is that we consistently deliver both. So consistently both strong top line development at good healthy margins that allow us to keep developing the business. As we see so many opportunities and at the same time then from the opportunity point of view we see also some needs internally where we need to increase our efforts such as product development, channel development, stronger digital offering as part of our portfolio, even stronger digital channels to the market etc. So that profitable high growth margin growth allows us then to make the company also stronger for the coming years.

LVMH's Q1 2025 highlights - a weak start to 2025 $LVMH $RMS

1/ 3% organic revenue decline, falling short of analyst expectations calling for a 2% increase. The Fashion & Leather Goods division, accounting for nearly half of total sales, experienced a 5% drop.Louis Vuitton outperformed the division average, while Dior underperformed slightly. Brands like Celine and Loewe are undergoing creative transitions, impacting sales. 2/ Regionally, Europe showed modest growth of 2%, while Asia (excluding Japan) declined 11%, primarily due to weakened Chinese demand. The US saw a 3% decline, and Japan was down 1%.

Why we named Harvia our top quality growth pick for 2025 and beyond (got extensive deep dive available on our S-Stack). A 🧵on this great company. $HARVIA

° relatively unknown, but covering a niche sector
° unmatched operational efficiency
° under-promising and over-delivering 1⃣ In the U.S. alone, the sauna market is estimated at 800m USD, growing at 10-15% annually. Following the ThermaSol acquisition, Harvia holds a 14-15% market share in the U.S.

If Harvia doubles its U.S. revenue by FY 2027 and maintains 5% annual growth in other regions, the company could achieve mid-teens percent annual NOPAT growth, coupled with strong cash flow thanks to its high ROIIC.

Its sales breakdown by geography can be found below.

Three one-pagers on quality-investing - successful serial acquirers, valuing companies, and the nuances to a DCF. A thread🧵



Serial acquirers - Thanks to the higher NPV (Net Present Value) of future cash streams, negative capital employed serial acquirers with good organic growth have the highest return potential amongst all others. Simply stated, high or low organic growth: it won’t matter that much to overall working capital and CAPEX movements. Organic growth expenses show up in their P&L and are being compensated for by revenue growth. Unsurprisingly, we feel comfortable putting most of our allocation to serial acquirers in the CSI family basket.

When a serial acquirer runs out of growth opportunities, organic growth and/or sees its ROIC deteriorate, investors should reset their expectations. For some of the Swedish serial acquirers, total EBITA (and NOPAT) growth has been pretty astounding as of late. Investors have been paying up for their future growth outlook but they'd better be cognizant of the main driver behind that growth: margin expansion. The current multiples reflect the tailwind of efficiency enhancements we've witnessed over the past 5 years. Rather than upgrading their revenue growth forecasts, investors are counting on that very same profit tailwind to justify their future fair values. So, beware.

How to Identify the Best Serial Acquirers👇

Serial acquirers have become popular with Constellation, Lifco, Lagercrantz, Addtech vastly outperforming the market over the past years and decade(s).

What to look for in a great serial acquirer & what are the challenges? A thread 🧵 1/ Large Pool of Opportunities

When searching for Compounding Tortoises, serial acquirers have proved to be a good starting pool for further screening. Coupled with organic growth, these vehicles can keep on growing at a double-digit clip, just by acquiring new companies.

And there are many serial acquirers: in VMS, niche industrials...

Getting started with quality growth investing: why does it work and what to look for? A thread to help you on the way to success. It's based on our most-read S*bsta*k post. We'll share some ideas at the end.🧵 1/ Quality growth companies are in fact long-term value stocks. They've outpaced our expectations, allowing us to earn returns way above our hurdle rate. The trick is to keep compounding your cash flow, NOPAT... through good times and bad.

An introduction to $LIFCO 🧵

- Swedish industrial serial acquirer
- 4% decline in Q1 EBITA (year-over-year)
- Trading at 27x EV/NOPAT (FY24)
- Business segments: Dental, Demolition & Tools and Systems Solutions Diverse segments

At the @Redeye_ serial acquirer event, CEO Waldemarson said that acquiring new businesses is always a matter of choice. "We’d love to buy many dental business (with good margins, when the valuation is right). But: we’re forced to do that.”

Many of Lifco’s competitors that operate solely in the Dental area have to continously source deals in that area, even during times when it’s not convenient (higher multiples, lower-quality pipeline of potential targets).

The best European high-quality small cap very few investors have heard of before. Not buying aggressively was our biggest mistake in Q1 and potentially our biggest mistake of the past 5 years.🧵

$HARVIA 🇫🇮, the world's leading sauna and spa company, has delivered a total 5-year CAGR of 44.6%.

It has a ROIC of >30%, plentiful of assets that have yet to become fully utilized (i.e. future CAPEX requirements are low), a strong growth strategy in foreign markets and solid financial structure that should allow it to deliver mid-teens IRRs going forward. We love Harvia's products: it's great to enjoy the warm feeling and aromas of a traditional sauna. And all around the world, the awareness of the sauna and health benefits are strongly on the rise.

Regular sauna bathing several times a week has been proven to reduce the risk of high blood pressure and other cardiovascular diseases, pulmonary disease, stroke, and dementia, among others.

On top of that, demand in emerging market areas continues to be skewed towards more high-end products, driving strong profit growth for Harvia.

Never lose sight of Return On Invested Capital! Working on a new deep dive about Autozone $AZO

In 2022, we published several write-ups on $ORLY $AZO One of the frequently highlighted 🐻 arguments is risk of online disruption. Our thoughts back then 👇 One of ORLY's smaller competitors (with about $650M in annual sales) is (PRTS) which positions itself as a disruptor and intrigued many growth investors at the beginning of the pandemic.

At-the-market equity offerings have so far managed to keep the company afloat, while the underlying business continues to destroy shareholder value as the gap between return on capital and the weighted average cost of capital remains 25+%.

Not the kind of business one wants to be invested in under today's circumstances.CarParts.com

Quality - the under-appreciation of well-managed businesses

Follow and retweet this thread 👇👇 1/ Unfounded pessimisms on the future profitability of high Quality firms drive premium

Forecast data show that financial analysts are, on average, too pessimistic regarding the future profits of highly profitable companies. This gives rise to the profitability anomaly, which they also find to be particularly strong for firms with persistent profits.

The 8 highest-quality Dividend Aristocrats (>25 consecutive years of rising dividends) based on ROIC, EPS growth and balance sheet strength👇

Which one(s) do you favor/own?

1/ W.W. Grainger
> Industrial supplier 2/ Linde Plc
> Industrial gases

10 High-Quality Serial Acquirers You Should Know
Which one(s) do you already own?

Graphs @finchat_io

1. Constellation Software
👉 VMS businesses
👉 Long-term focused bonus plans: no share-based compensation!
👉 Market Cap: 78 billion CAD
👉 Mid-term expected EBITA growth: >20% per annum
👉 ROIC: +/- 22%
👉 Trading at 43x adjusted net income in 2024 2. Topicus com
👉 VMS businesses in Europe
👉 Clear focus on organic growth incentivization
👉 Market Cap: 13.6 billion CAD
👉 Mid-term expected EBITA growth: >28% per annum
👉 ROIC: +/- 25%
👉 Trading at 34x adjusted net income in 2024

Read our most recent Substack deep dive on this one