저자: BrunoKreidler · 외국인
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테리 스미스 포트폴리오 55종목을 이익수익률(EBIT/EV)과 투하자본수익률로 필터링해 상위 7종목을 선별. 질 높은 기업을 다소 높은 PER에 사는 전략을 소개하며, ADP, Philip Morris, Edwards Lifesciences, Domino's, Paycom, Home Depot, Otis를 상위권으로 꼽음. 특정 종목의 향후 주가 방향 예측 발언은 없고 과거 실적과 장기 관점 위주. 면책 고지 포함.
다듬은 글
Hey everyone, in the last video we talked about Terry Smith, who, in my opinion (and I think this can be said quite objectively), is the best stock manager in England in terms of performance. We also took a quick look at his stock portfolio, which contains 55 stocks. But we didn't have time then to examine all the positions in detail, and that's exactly what we want to do in this video.
Even today, we don't have time to delve into 55 companies, so yes, that's why I spent a few too many hours last week, in my opinion, poring over Excel spreadsheets to create a ranking of the 55 stocks he already considers good. The goal was to filter out the best ones that we could take a closer look at and potentially invest in ourselves, without having to be directly invested in his fund.
Why did we even create a filtered ranking using a combination of different ratios? What does the author of this book have to do with it? And which seven companies out of the 55 performed best? You'll find out after the disclaimer: this is not investment advice, and you are responsible for all your own investments.
Of course, you are still responsible for your own decisions. You can find more detailed information at keineanlageberatung.com/disclaimer. Terry Smith, who manages 25 billion British pounds, doesn't do this for nothing. Over a relatively long investment period, he has been able to invest capital with an average return of 15.4%, during a time when the broader market only generated 11.5%.
His main focus is on finding high-quality companies – companies that are better than average, companies with high cash conversion, high margins, rock- solid balance sheets, good revenue growth, and simply put, figures that are significantly better than those of the average company included in, for example, the S&P 500.
And as one viewer correctly pointed out, he is willing to pay a higher price for this. Terry Smith deliberately buys companies with P/E ratios lower than the benchmark index, knowing he is getting higher quality. He also pays higher free cash multiples for these companies, but that's not a problem because he knows that the higher quality pays off in the form of higher growth, higher profit growth, greater security, and lower costs.
Volatility and so on, and he justifies all of this as follows: we'll switch back to German in a moment, so please bear with us. If you bought the S&P 500 at a PE of 5.3 in 1917 and sold it in 1999 at a PE of 34, the annual return would be 11.6% per company reinvested. And this is precisely the reason why I'm making this entire video.
He uses this argument to demonstrate why he's willing to pay higher multiples for his companies because he says that, in the long run, a large portion of investment gains comes from revenue or profit growth, and that's correct. He's looking at a period of 82 years in which the market multiple increased from 5.3 to 34.
That's a huge multiple expansion, but it's an even longer investment period. If you look at an investment period of 5 to 10 years, then multiple expansion can be a huge driver of investment gains. And that's why I'm saying quite clearly what you pay for a company today if you do n't invest 30 times in your company.
Not just for 40 years, but perhaps only for 5 years – a very, very important part of the investment or investment thesis. And that's precisely why we're looking at all his investments today, which are already high-quality companies he's handpicked, and trying to find one or two that are valued a bit more gently.
And that's exactly where this book comes in: "The Little Book That Still Beats the Market" by Joel Greenblad. Because in this book, Joel filters company stocks based on two and only two factors and has found that these two factors are the best predictors of investment returns. This means you don't look at any of the companies he's filtered out in detail, but simply filter thousands of companies based on two criteria: a high earnings yield and a high return on equity.
The combination of these two results in a group of companies that, on average, have significantly outperformed the market and have continued to do so in recent years. So, to reiterate the overview: we'll use the already high-quality 55 companies in Terry Smith's portfolio and filter them accordingly.
Earnings yield, which is simply the inverse of the P/E ratio, I'll explain briefly in a moment. After that, we'll look at return on equity, or in this case, return on invested capital. Finally, there will be a ranking of the companies that performed best based on these two factors. But let's start with the companies that have a high earnings yield.
I've created the first table showing the 15 companies in his portfolio with the highest earnings yield, or, to put it simply, the most attractively valued. As already mentioned, the earnings yield is simply the inverse of the P/E ratio. So, in first place, for example, we see Diageo with an earnings yield of 8.4%.
That would be 1/e ≤ 0.0, which corresponds to a P/E ratio of 11.9. But that would be far too easy. Bruno would n't be Bruno if he made life easy for himself, so I made it more complicated. I used the formula that Joey Greenblad also used in this book, which, in my opinion, is the best. Investors you should study if you're already familiar with Warren Buffett's work, because instead of simply reversing the P/E ratio, we took the EBIT and divided it by the enterprise value.
If you can make sense of that, congratulations, you've probably been investing for a while. For everyone else, it's enough if you can read these percentages; there's no need to complicate things. But I calculated it this way for all 55 companies to improve comparability. Of course, we're only considering one of two criteria here, meaning the significance is somewhat limited.
However, it does rule out the possibility that the companies in his portfolio are, on average, relatively expensive. He does n't have a single company with a single-digit P/E ratio in his portfolio. Diageo, with an earnings yield of 8.4%, is still the cheapest. And when I talk about valuation, I simply mean based on the multiples.
To determine whether a company is expensive or cheap, a complete analysis is necessary. This list only includes the multiples, of course. Cigarette companies like Philip Morris, which naturally have a slightly lower multiple than the overall market, but also companies like LV (Low Energy), Domino's Home Depot, or Ottis, the world's largest manufacturer of elevators and escalators, are included.
So, there are some companies that are definitely interesting and that I will definitely take a second look at before we look at the combined table. Regarding the two factors, let's look again at the companies with the highest return on invested capital. By the way, you can also calculate the return and invested capital in your own way, as was done in the book, and there you would factor out intangibles, goodwill, and so on.
I have n't done that here; I used data from Ticker, essentially the Bloomberg for private investors, because that's sufficient for a basic comparison between the companies. For the individual analyses, you would then have to calculate it yourself, but that would have been far too much work for 55 companies.
Very importantly, the return on invested capital is not a hard criterion; it roughly indicates the direction in which growth might go in the future and how efficiently a company uses its own capital to create new growth. Many companies that are getting bigger... The return on invested capital then also decreases slowly step by step.
It's a very good criterion which, in combination with the profit margin, offers a pretty good result on average. But we'll look at that in a moment. First, we'll just look at these companies sorted by return on invested capital, specifically the 15 best according to this ratio. And surprise, surprise, right at the top, we see a cybersecurity company with Fortinet, but also Mastercard Automatic Data Processing, Visa Technology One, and many other tech and information companies that don't need to make large capital investments to create new growth.
Up to this point, however, was the rather boring part of the video, in my opinion. Now we come to the combined table. As the attentive viewer will have noticed, each company has been ranked for both of these criteria, and from these rankings, we can now create a new table with companies that, on average, have a high profit margin and a high return on invested capital.
This means that companies that might be ranked 10th in both tables can be ranked 1st in this combined table, while a company that is quite expensive but has a high return on invested capital will be ranked lower. This table probably won't be particularly high up; it's about the combination, which is also shown in this book and is very, very important for selecting a group of stocks that beat the market on average, and beat it significantly.
We've made use of this entire principle here. We'll go through positions 20 to 7 a bit faster, and then we'll take a closer look at the top 7 companies in this ranking. Number 20 was McDonald's, before that Mastercard, Diageo, Meta, Apple, Alphabet, Unilever, LVM, Asch, Audity Tech, and in 11th place, Choice Hotels International.
Visa was in 7th place, before that Nike, Mariot International, and then we've already arrived at number 7. In 7th place is Automatic Data Processing (ADP). They've been around since 1949 and have grown very steadily over time. But what do they actually do? They provide software solutions for other companies, to be precise, HR software that simplifies services like payroll, time tracking, and travel expense management.
In the USA, one in six employees is managed with ADP's software, and they now have over a million customers. As is typical for such an old enterprise software company, the days of exponential growth are behind them, but... Over the past 10 years, it has still managed to grow by an average of 6 to 7%, and earnings per share have even increased somewhat faster.
This could be due to share buybacks or improved margins, etc. In sixth place is a well-known company, Philip Morris International. I uploaded a stock analysis of Philip Morris to keinanlageberatung.com a few weeks ago, which actually resulted in this investment, so I know the company quite well. As one of the largest tobacco companies worldwide, they now generate 36.5% of their revenue from smoke-free cigarette alternatives and lead this market with ICOs and Sinn, which, in my opinion, are currently the most hyped brands in this area.
In fifth place is Edex Laboratories. This is a pharmaceutical company that produces services for livestock, pets, and also humans. As is typical for a successful pharmaceutical company, they have demonstrated quite stable growth with impressive figures over a long period. Their main focus is on rapid testing devices that can be used to analyze blood, urine, and so on.
There was consistently over 10% revenue growth per year. Only in 2021 was some growth brought forward, and then a little less in the following year. But a company that can maintain above-average growth for so many years is also valued accordingly. Earnings per share rose rapidly from $ 1.79 to over $10 per share over the last 10 years – that's more than a fivefold increase.
In fourth place is Domino's. We all know Domino's, and the company is also a complete success on the stock market, even if the last quarterly figures weren't particularly well received by the market. What's perhaps more important for a franchise operator than the profit they ultimately make with a store is what it actually costs to build that store, and that, together with the profit, ultimately determines the return on the entire venture.
And here we see Domino's and McDonald's in comparison: the share price up to 2020. Domino's increased 40-fold over the period, while McDonald's only increased ninefold. What's the reason for this? The explanation is quite simple: if you want to open a McDonald's restaurant, it will be expensive. I hope you've already saved some money, because on average, a franchise restaurant costs $2 million to get up and running.
A Domino's restaurant, by comparison, can be set up for as little as $100,000, and premium Domino's restaurants go in the direction of $500,000. A McDonald's restaurant generates an average profit of $150,000, while a Domino's restaurant, as they said in the last earnings call, generates an average of $170,000.
This means that McDonald's has an average return on its restaurants of 7.5%, while Domino's has a return of 30%. It's very important to note that we're looking at the return for a franchisee here, not for the company behind it. Of course, if the franchisees are doing well, the larger company behind them is probably doing well too.
The share price recently fell by 25%, but there are reasons for that. Growth is n't keeping pace as it should, and from 14% in 2021, it was only 6% in 2022, 4% in 2023, and now revenue has even fallen by 1.27%. However, this year is already going much better. They were able to make a profit of almost $15 per share, more than ever before, even though they bought back a significant number of shares.
In third place is Paycom. This company is worth almost $10 billion and has experienced a considerable fall, declining by over 60% from its peak. Management is currently buying back shares quite aggressively. In principle, they do exactly the same thing as the automatic data processing we've already discussed—HR software for managing employees.
The problem with looking at these two companies is that I have absolutely no idea about... HR software is certainly something you can delve into, figuring out the differences between the various software solutions and talking to people who use these products daily. But I see my time better spent elsewhere at the moment.
Nevertheless, these companies are delivering fantastic figures. In recent years, they've mostly had revenue growth of over 20%, sometimes even over 30%. I'd have to look into whether any acquisitions are included. Earnings per share have risen even faster, and with a P/E ratio of only 20, I find that more than impressive.
Perhaps the fallen share price, along with management's share buybacks, is now the perfect time to take a closer look. The multiple has finally reached a fairly low level after all these years, which does n't make the company cheap right now. We first need to find out how things are likely to develop in the coming years, because the recent figures definitely had their flaws here and there.
I will definitely include Paycom in the next voting round for the investment advice blog next month, where you can vote again for a candidate that will be covered in a stock analysis next month. Paycom will be one of them. Of the three companies, Home Depot is in second place. It 's one of the best-known home improvement retailers in the USA, probably even worldwide, because they're also active in Canada and Mexico, and it just keeps going wonderfully.
Growth isn't particularly fast anymore, averaging around 5% in recent years, with the pandemic being a slight outlier. Earnings per share have outpaced revenue growth. This could be due to various factors, but in Home Depot's case, it's due to strong share buybacks. It's a super disciplined company that returns capital to its shareholders through share buybacks and dividends.
The figures for home sales in the USA don't look particularly good right now, which is always a good predictor for home improvement chains in the USA. But if you look at it in the long term, it's certainly not a bad company to take a closer look at. The company that has performed best on average, both in terms of valuation and return on equity, is Ottis, the elevator company.
Ottis has a global market share of 16% in elevators. Incidentally, Schindler is close behind. You probably see them more often in Germany when you're in an elevator, but they're the clear number one worldwide. They're constantly expanding, innovating, and even doing escalators and a bit of subway construction.
These are all very stable markets, and overall, they're a great company in my opinion. They only went public not too long ago, but are already worth 37.5 billion US dollars. Their business isn't selling elevators and escalators, but rather servicing them. I think the Trojan horse I created visualizes this quite well.
Their revenue fluctuations are relatively irrelevant, though, and might even lead some people to misunderstand the company. Their profit depends entirely on the service segment. The margin on equipment sales is close to zero, while the operating margin in the service segment is, I believe, around 25%.
This allows us to see a great development in their profits. All blog readers can look forward to it because I've been working on an in-depth analysis of TIS for some time now. It will take a few more days, but I'm putting a lot of effort into it. It will be ready soon. That's it, I'm really looking forward to it, but that completes the ranking, and I think that on average, there were some really great companies included.
For anyone wanting to build a solid portfolio, like the fund itself, Funsmith, doesn't aim to beat the market by 10%; they only want to beat it by 2-3% per year over a long period. Anyone wanting to build such a rock- solid portfolio, I think this list provides a good starting point for companies to take a closer look at.
What's striking is that a number of companies emerged that you can get for multiples of 20. Whether you call it a 20 free cash flow multiple or earnings multiple, whatever, you're paying roughly a 20 multiple on the profits of these companies, and in return, they generate significantly above-average growth.
I've picked out some cars to delve even deeper because it's a really interesting situation. I think it's also because they haven't been on the market that long and therefore don't have that much coverage yet, but otherwise, these companies are, on average, a bit too expensive for me. These are two completely different investment approaches, or rather, not completely different investment approaches.
But yes, I don't like paying above-average prices for companies. I prefer to pay below-average prices and invest in significantly fewer companies, and I'm willing to dedicate more time to it. But that's just how it is. This completes part 2 of Terry Smith's story. I found it super exciting again. Let me know what you think.
And my voice is giving out now, so see you in the next video. Until then, take care.
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