There’s a couple of investors I have in mind for the potential sequel to Market Masters. I already mentioned Francois Rochon in a past newsletter. His firm, Giverny Capital, has posted a 16.3% compound annual return since inception. Another investor I would like to interview is Andrew Brenton of Turtle Creek Asset Management. Since Turtle Creek was founded by Andrew on November 1, 1998, an investment of $1,000 has grown to over $49,7501, which equals a compound annual return of 24.1%. That demonstrates a remarkable wealth-building ability. Turtle Creek is long only, comprised of North American equities (primarily Canadian, ~ 25 holdings), with average $7 billion market capitalizations.
While I haven’t sat down with Andrew yet to document his investment strategy in detail, I’ve conducted some preliminary research. And so what I’ve posted for you below is Andrew Brenton’s approach to “Identifying the Companies We Want to Own (and Their Common Characteristics)”, sourced from his 2015 Letter to Shareholders:
“The universe of companies from which to choose is quite large – there are approximately 2,400 companies listed on North American stock exchanges with market capitalizations of between $1 billion and $25 billion. So how do we sort through them to identify the ones that deserve our attention?…
The first common characteristic is that our companies are cash flow positive andthe second, related characteristic is that they typically have strong balance sheets. Essentially, none of our companies need us – they don’t need the public markets to pursue their business strategy. That doesn’t mean they never access the capital markets by selling treasury shares; many of them have issued equity over the years, but they generally don’t ‘need’ to and tend to do so only at attractive prices… Great businesses typically generate more free cash flow than they can profitably reinvest and therefore don’t need to raise additional equity capital. More importantly, they don’t need to raise equity capital at times when prices would be dilutive to shareholder value. Our companies are good at allocating capital, including the substantial cash flow that they generate.
In addition to deploying their cash internally on high return opportunities, many of our companies deploy capital externally on acquisitions. This is the third common characteristic. Currently, over two thirds of the portfolio, by value, is comprised of companies where growth through acquisitions is an important part of their strategy. Our background and experience allow us to select good acquirers, avoiding the multitude of companies that destroy shareholder value with acquisitions. Our companies have a variety of approaches to creating value through acquisitions but all are capable and disciplined buyers that are not willing to overpay. Our companies would rather sit on the sidelines when prices are too high.
A fourth common characteristic is returning capital to shareholders, either via dividends or repurchasing their own shares. But in the case of share buybacks, the purpose is not “interesting E.P.S. accretion” as one CEO put it; our companies decide whether or not to repurchase their stock with the same hard-nosed evaluation to which they subject potential acquisitions. Good allocators of capital understand when their shares are cheap, just as they understand when an acquisition is well priced.
The fifth and final characteristic is that our companies have big, rational ambitions. While most of our companies have global ambitions, some are content to operate only within Canada or the United States. That’s why the modifier ‘rational’ is important. It’s not enough to own companies that have big growth plans. Growth for its own sake can be a recipe for disaster. It’s important to own companies that press their advantage when it serves and know when to pull back in the face of a poor environment or irrational competitors.”
To summarize, the 5 characteristics that Andrew Benton looks for in a company are:
1) Cash flow positive
2) Strong balance sheets
3) Deploy capital externally on acquisitions
4) Return capital to shareholders, either via dividends or repurchasing their own shares
5) Big, rational ambitions
Open Text Corp. is a core holding in Turtle Creek’s Fund. I encourage you to read Andrew’s thought process on investing in Open Text. It’s a great case study framework that you can apply to your own stock selection process.
The Outsiders Podcast
In my last newsletter, I recommended that you read The Outsiders, which is a book about 8 exceptional capital allocators. However, if you don’t intend on reading it, The Investors Podcast just released a new podcast, outlining all 8 CEOs from The Outsiders and how each ran their respective companies. Listen to the podcast here.
Free Cash Flow is King
Will Ashworth, a journalist at Motley Fool Canada, picked up Market Masters from the library, read it from front-to-back, and then was inspired to write this article based on Barry Schwartz’s strong focus on free cash flow from my interview with him.
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Robin Speziale is the national bestselling author of Market Masters, which is available at Chapters, Indigo, and Coles as well as Costco and Amazon.ca. He lives in Toronto, Ontario. Learn more about Market Masters.