Amit Kupfer @AmitKup: "My approach to investing is..."

United Kingdom

My approach to investing is based on three simple ideas: What you pay (Pricing), what you own (Quality), and how it compares (Relativity). I want to buy pieces of companies that generate good, reliable free-cash-flows (quality profits) from what they own (quality assets), but only when I can buy them at a fairly low price (attractive valuation). How to Measure a Company's Value? We need to measure a company's worth using two different yardsticks: Against Itself (Absolute Assets): How does the company's price compare to the total value of its buildings, cash, equipment, intangibles, and other core assets? Against the Competition (Industry Context): How does the company's price and performance look when compared to other companies doing the same kind of work in its sector? This is the important part: What does "cheap" actually mean? A stock can be absolutely cheap (measured by P/B, P/E and other rations). But it's as much important if it's relatively cheap—meaning it's a better deal compared to the price of the average stock in the entire market. It’s the same with quality: Consider a practical dilemma: If you must choose to buy only one item with limited space, ignoring emotional attachments, you select the one that offers the best blend of being cheaper and higher quality. While investors often prioritize one trait, the ideal opportunity emerges when both quality and low valuation align. The best opportunities come when you find a company that is clearly high quality but is currently priced as if it were low quality. My Golden Rule: I always try to buy above-average assets (good companies) at below-average prices (a bargain). The simplest and most straightforward way to measure a high-quality business that possesses strong assets and a moat (a competitive advantage) is to observe its ability to generate a high Return on Invested Capital (ROIC) over a prolonged period. The longer the sustained track record, the better, as it proves the business's resilience against economic cycles. Furthermore, a high ROIC indicates that by growing, the business is creating value for shareholders rather than destroying it. Companies like $AXP (American Express CO) , $COKE (Coca-Cola Consolidated Inc) and $GOOG (Alphabet) are excellent examples with long-standing records of high ROIC. What an investor must then determine is why these companies have managed to sustain such high ROIC for so many years, and whether that competitive advantage is in danger from new competition. Let's examine an example from our portfolio. Another company that stood the test of time is Western Union. Western Union provides a compelling example of a business that has maintained a high Return on Invested Capital (ROIC) over many years, despite facing massive technological disruption. Its enduring profitability stems from a combination of unique, high-quality assets and a deep, structural moat. WU's primary quality asset is not physical (buildings, pipelines, etc)—it's its vast, interconnected global distribution network and the accompanying brand trust. Western Union's ability to produce high ROIC (average 26% over the past 5 years) is rooted in the nature of its assets: Low Capital Intensity: Unlike manufacturing companies, WU does not require massive investments in plant, property, and equipment (PP&E). Its "assets" are primarily the contractual relationships with agents and the technology/compliance systems—which require less capital relative to the revenues they generate. High Operating Leverage: Once the network is established, the marginal cost of processing an additional transaction is very low. This allows a large portion of the revenue (transaction fees) to flow directly to profit, resulting in a high ROIC. Pricing Power: In many of the corridors it serves, particularly those requiring cash pickup in remote locations, WU faces limited competition for comparable speed and reliability, allowing it to charge premium transaction fees. We can safely say that WU's assets are top-notch, earning a 26% Return on Invested Capital (ROIC), which significantly outperforms the 8%–10% for the average S&P 500 company and the sub 4% achieved by direct competitors like $RELY. By the way, in this business sector, only $WISE.L (Wise Ltd) is comparable to $WU (Western Union Company) in terms of high ROIC, and we hold them just as dearly. - Absolute Quality – Check - Relative Quality – Check This leaves us with pricing: Is WU cheap enough for us to enjoy the twin engine effect of quality assets and bargain pricing? Cutting to the chase, WU excels here as well. The company is currently selling for a Price-to-Earnings (P/E) ratio (TTM) of 5.17x. This is remarkably cheap compared to the Sector Median of 11.42x and the S&P 500 average of 28x–31x. Furthermore, it is priced below its own historical valuation, trading at 7.85x its five-year average P/E. - Absolute Price – Check - Relative Price – Check Continue reading the full post in the comments below >>>>>