6 GARP Investors to Follow

Tis’ the season and I hope everyone is enjoying this time of year. I just finished celebrating Hanukkah and Christmas is only a couple short weeks away. With the new year just around the corner, I thought I’d put together a list of some great investors you all should have on your radar. I try and soak up as much wisdom as possible and these investors are dripping with juicy nuggets of information. This list ranges from bloggers to CEO’s of Fortune 500 companies, running the entire gamut. Knowledge can be gained from all kinds of different sources. This is far from a complete list, but just a few names you all should familiarize yourselves with.

  1. Francois Rochon-  First on our list is Canadian investor Francois Rochon. Rochon started his investment firm, Giverny Capital, over 20 years ago. Unfortunately, I had never heard of him until earlier this year. To make up for this delay, I devoured all of his annual reports in a single day. He is a classic GARP investor, focusing far more on the quality of a business than on the price of a stock on any given day. He is more concerned with how the earnings of a company are increasing each and every year. His returns are admirable, averaging 15.7% since 1993 as compared to the index result of 9.2%. Over the course of 25 years, this discrepancy has led to magnificent results. I particularly enjoy his writing style, mixing humor and humility. He includes a section every year highlighting his greatest mistakes, something that every investor can surely relate to. My own personal account seems to overlap with his constantly, with companies such as: Markel, Berkshire, Google, Visa and Union Pacific showing up in both. You can see his reports located on his company’s website
  2. 2. Pat Dorsey– I was introduced to this famed investor through Patrick O’Shaughnessy’s great podcast The Investor’s Field Guide. Dorsey gained notoriety through being the director of equity research at Morningstar, a well known investment research company. He went on to write a couple of highly regarded books The Five Rules for Successful Stock Investing and The Little Book that Builds Wealth, as well as start his own asset management firm. He focuses on companies with strong moats, otherwise known as durable competitive advantages. Due to those advantages, they are able to keep high returns on capital far longer than the average company. In his own words, his strategy can be summarized as “We purchase these businesses at what we believe to be reasonable discounts to a rational assessment of intrinsic value, and we seek to invest in companies with corporate managers who we believe can allocate capital in ways that benefit long-term minority shareholders.” Here is a great compilation of resources he has shared on his Website
  3. Warren Buffett– I would be remiss to make a list of extraordinary investors and exclude the granddaddy of them all. While often thought to be a value investor, I think he can more appropriately be given the categorization of a GARP investor. I probably don’t need to spend much time talking up his accomplishments, you’ve heard them all before. Just know that he is as wise as they come and his lessons are timeless. You can of course read his annual reports, watch his numerous interviews or even go to Berkshire Hathaway’s annual shareholders meeting as I have done myself in the past.
  4. Mark Leonard– Another famous businessperson I am embarrassed to have only found this year is Canadian superstar CEO Mark Leonard. Leonard is the CEO and founder of Constellation Software. While Warren Buffett has famously avoided technology, Leonard has embraced it. Realizing that software companies in niche industries spin off tremendous amounts of cash while only requiring minimal ongoing capital investments, Leonard has created a decentralized juggernaut. Leonard uses the vast amount of free cash to then acquire an ever growing list of niche software companies.  His real brilliance was in identifying how strong a moat these companies could have. Think of a dentist or an optometrist. Once they start using a particular software for their office, it becomes incredibly difficult to switch. All of their patient records are stored on that program. In order to switch, all of that data would need to be reentered and staff needed to be retrained on a brand new software. He has taken that premise and bought up companies in hundreds, if not thousands of different industries. You can read his annual letters, going back all the way to 1996 here.
  5. John Huber– I’ve been following this fellow blogger for a number of years at BaseHitInvesting. Not only does he run an incredibly informative blog, he also runs his own fund, Saber Capital Management. In his own words “Our general strategy is to make meaningful investments in high quality, predictable businesses that can be expected to grow intrinsic value at high rates and that are currently available at cheap prices.” I would peg that definition right up the GARP alley. I’ve learned a lot from Mr. Huber over the years, particularly his series on ROIC and compounding. He recently wrote up a new post entitled “Facebook Is Undervalued.” I’ve shared my thoughts on FB previously and the two of us seem to see eye to eye. I look forward to reading more of what he has to say over the years.
  6. Connor Leonard– I was introduced to our final GARP investor of the day through a guest post on Huber’s blog BaseHitInvesting a couple of years ago. Leonard(No relation to Mark as far as I know) runs the public securities portfolio for Investment Management Corporation. IMC is a particularly interesting business case study. On only $50,000 of startup capital, the founders started the restaurant Golden Corral. Due to managerial brilliance and the fixation on cash flow, they have never needed to invest a penny more. With such great cash flow, they have entered into many other business arenas, as well as their public securities division, which is where Leonard fits in. He runs his portfolio in a GARP oriented style. With a focus on moats and capital light compounders he has found great success. I foresee his notoriety in the investment community growing considerably over the years.

As always thank you for reading. I hope you found this post interesting. These are all great investors you can learn a ton from. Subscribe and let me know what you think. Thanks again!

Advertisements

The Double Dip!

I’ve gone ahead and hitched my wagon to Mark Zuckerberg. I bought 5 shares of FB on Friday for $878.90 and another share on Tuesday for $168.94 after seeing the company fall another 3.5% for a grand total of $1,047.84. I broke one of my original rules, never go above 10% in one company. Rules however are meant to be broken, I saw an opportunity and jumped on it. Besides I only stuck a toe over that 10% line.

I also purchased 5 shares of IPGP, the premier laser company in the world. Shares were down over 4% today, so I used this as a buying opportunity. I got in at $161.74 a piece for a total of $808.70. I continue to love the company and consider this to just be a blip on the radar.

For those keeping track, I now own 4 stocks and still have $6,723 out of my original 10K with which to buy more!

Why Facebook?

Facebook is one of the most phenomenal companies of my investing lifetime. Started in 2004, they are already one of the largest companies in the world. They IPO’d in 2012 at a market cap of 104 Billion. They now sit at 412 Billion meaning they have come close to quadrupling in that time period. Will they quadruple again over the next 6 years? Most likely not, but I wouldn’t completely rule it out. I do however think they have a great chance of outperforming the S&P 500 over the next 5 to 10 years by a considerable margin.

Commonly lumped in to a group called FANG stocks, I actually think they share a lot more in common with Google and Microsoft than they do with Netflix and Amazon. I find Amazon and Netflix to be almost impossible to value. They are great companies that provide incredible products to their consumers. That being said, Netflix continues to be cash flow negative and Amazon is in a world of their own in terms of valuation. I’d rather just stay away. Facebook, Google and Microsoft can all be valued by traditional value investing principles. They create meaningful profits and turn those profits into incredible amounts of free cash flow.

Let’s look at what makes Facebook so compelling. Over the last 5 years, sales have skyrocketed from 7.8 billion to 40.6 billion. This gives us a CAGR of 38.87%. EPS grew from .6 to 6.16 over the same time period, giving us a CAGR of 58.87%. It doesn’t take a rocket scientist to tell this is phenomenal. FB now sits at a P/E of 23.65, a laughably low number considering how fast it has grown in the past. They are sitting on 41 Billion dollars of cash and short term investments without having a single dollar of debt. That is simply incredible.

The past however does not automatically promise future performance. We have to examine what Facebook’s future holds. After their latest quarterly release, the stock plummeted from fears of reduction in future growth. I find these fears unfounded. Of course FB has to slow down. If they continued to compound above 50%, they would be bigger than the entire S&P in a short amount of time.

In the short term, there will be pain. Just today, representatives of the company are testifying before congress about what they can do to stop meddling in the midterm elections. This once again represents short term thinking. Facebook is a platform that is singlehandedly strong enough to affect a US election. That power is only growing stronger. They have daily users that number almost 1.5 billion and monthly users above 2.2 billion. They have barely even started monetizing the platform. Just the talk that FB could get into dating caused dating juggernaut Match Group’s stock to fall 20% in a day. It is a platform of strength never before seen in US history.

Instagram

I have yet to even mention Instagram, one of the most popular social media platforms and one of Facebook’s chief “competitors.” You see, Facebook bought Instagram for 1 Billion in 2012, proving they have their eye on the ball in the acquisition space. Some estimate Instagram alone could be worth upwards of 100 billion, 1/4 FB‘s total market cap. Yesterday rumors abounded that Instagram is developing a new shopping app. This platform is still in its infancy, just figuring out ways to monetize for shareholders.

The truth is we don’t know what the future holds for this company. We can merely look at their past success and determine whether we think the future is bright. In my opinion Facebook will be a trillion dollar company in the not too distant future and who knows how large it could grow. Stop thinking in the short term, but determine whether you want to own a company for the next decade.

Lasers

IPGP holds a particularly soft spot in my heart. You see for a while, it was by far my best investment ever. Within a year of buying it in my personal account, I had gained over 200% more than tripling my initial investment. Of course, nothing is ever as good as it seems. While the business was going gangbusters, the Trump administration laid out tariffs that have caused Chinese companies(IPGP‘s largest customers) to reconsider how much they will spend on capital expenditures. You see, lasers powered technology are large up front capital requirements and given a trade war, companies don’t want to commit to large spending given the uncertainty. That 200% investment within one year has fallen to a 100% gain within two. Still not too shabby!

I’m willing to sustain some short term pressure to buy into a fantastic company with long term advantages. IPGP sells lasers that enable manufacturers to cut their costs. A business that allows their consumers to cut their own costs has a recipe for success. They are simply selling a better technology. Metal cutting and abrasion systems wear out, whereas lasers are more precise, cost less and last longer. This has translated into robust sales growth, which has in turn led to much greater profits.

Given how long I talked about FB, I didn’t want to get too far into the weeds with IPGP. Just know they are a great company with a long track record. They have a squeaky clean balance sheet and generate loads of cash. Who knows how long this trade war will last, but when its over, I expect IPGP to burst out of the gate at a sprint. I’m willing to hold on to this gem for the very long term.

As always, thanks for reading and subscribe!