“The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.”– Benjamin Graham.
In my previous article (Here), I had mentioned that in my view, investing is a combination of art and science. While science aspect of investing deals with financials of the business, etc.; art aspect of investing deals with the intangible aspects like quality of the business, the barrier of entry, management, growth prospects, etc.
In this article, I will focus on the art aspects of some of the businesses (stocks) I had acquired in the past and my thinking at the time. This is by no means a recommendation to buy those stocks at the current time or their current price levels and I may or may not still own these businesses.
HD (Home Depot):
In the United states, there is a virtual duopoly (Home Depot-Lowe’s) in the home improvement retail market; although there are other smaller players like Ace Hardware, Orchard; etc. Also, the home improvement retail stores have been virtually immune to the online shopping trend mainly because the buyers like to see the products first (before they buy them). So, although the big online guerilla Amazon has dented sales in most retail markets; it hasn’t made much headway in the home improvement market.
Out of HD and Lowe’s, HD has proven to be much better in terms of customer loyalty, sales growth, execution; etc. Some other aspects of HD that drew me to it was its disciplined growth (opening of new stores) and what they did with the free cash flow (buyback of shares, dividends) and the relative valuation vis a vis the free cash flow.
SAP (SAP AG):
SAP is the biggest player (by far) in the ERP (Enterprise Resource Planning) software market. Like most ERP software vendors, its revenue mainly comprises of two streams: new licenses and maintenance for existing licenses. What drove me primarily to SAP was barrier of entry to the business; stickiness of the product (so if a company spends couple years implementing SAP; what is the likelihood that the company will at some point abandon SAP and look at alternatives?) and the recurring annual license maintenance revenue (so if a company installs SAP software; it has to pay SAP company an annual maintenance revenue in perpetuity; just so SAP can support any issues with the software and provide periodic fixes/patches).
Who doesn’t know about Starbucks? Some European countries like Italy already had local coffee shops(bistros); in fact, Starbucks founder Howard Schultz got the idea of a coffee shop chain (and a third hangout place) on one of his visits to Italy having visited the local coffee shops.
Starbucks essentially invented the third hangout place in the US (a place for people to hang out besides work and home).
What attracted me to SBUX was its brand loyalty and awareness (so if I open a coffee shop say “Manish Coffee” next to a Starbucks and offered same/better coffee at same/lower prices; how many customers will choose to visit my coffee shop vs visiting the Starbucks shop next door; my guess is not too many). Another factor that attracted me to SBUX was its ubiquity in US and many other countries; essentially dissuading other companies to make inroads in those markets. SBUX also has an aggressive growth plan in China which may pay off handsomely in the long run; although there is some local competition now from the likes of Luckin Coffee (which primarily does deliveries right now). Also, SBUX has excellent Return on Equity (ROE) on its stores. Once a shop is up and running; not much capital expenditure is required to generate returns.
In my previous article (Here), I had talked about QCOM after its settlement with Apple. What originally drove me to QCOM was its IP (Intellectual property) licensing business; so essentially, cellphone manufacturers have to pay QCOM a percentage of the price for every CDMA cellphone; for using QCOM’s patented technology; for example technology controlling how modem chipsets communicate with cellphone towers; etc. Also, with the upcoming 5G adoption and QCOM being a leader in patents around that technology; it should profit handsomely as 5G is gradually adopted and widely used.
AXP (American Express):
There are mainly 2 types of credit card companies: one type is like Visa and Mastercard; whose cards are issued by other financial institutions/banks; so when a credit card is swiped for a purchase; the interchange fees (fees to process that transaction) is shared between the bank and the credit card company (Visa/MC). The other type is where the credit card company itself issues the card; so when the card is swiped; the interchange fees solely belongs to the credit card company. Examples of this type of credit card company are American Express and Discover.
What drove me to AXP was its business model; its brand loyalty and use (especially amongst corporate users and higher income people); its free cash flow (and allocation of it: share buybacks, dividends).
The corporate world is going big on analytics and one of the mainstream analytics products is Tableau. It seems every place I worked at was using Tableau or looking into using it. Tableau was also migrating to a subscription (and cloud) model; like most software companies; which brings in recurring revenue and certainty to it. In addition, the company had free cash flow (although the price multiple of the share price to free cash flow was rich, but sometimes the growth of the company may justify buying at such price). Recently, Salesforce bought Tableau at a significant premium; so that bet paid off; although I had only a small investment in it.