Searching for New Compounding Machines
When looking for "compounding machines," there is no better place to start than the portfolio holdings of Akre Capital Management.
Akre Capital Management runs a 12 Billion dollar concentrated portfolio that has consistently beaten the S&P 500 index with low turnover. Akre's equity portfolio typically consists of around 20 (mostly large cap) stocks, many of which they have held for a decade or longer.
Investing process
Chuck Akre (Trades, Portfolio) refers to the company's investment selection process as a "three-legged stool." The first leg is an assessment of the nature of the business and return on owner's capital. They try to assess what is unusual about the business that causes it to produce the results it does. The second leg is an assessment of the people who run the business. Are they acting in the best interest of all shareholders on a per share basis? The third leg is the reinvestment of free cash flow in the business. Reinvestment of free cash flow enhances the compounding effect of an investment in the business.
The selection process is essentially a qualitative process where they assess the quality of the business and bring in their judgement as business analysts.
Looking at Akre's largest position, American Tower Corp. (NYSE:AMT), you can see the compounding at work. Akre correctly identified early on that cellular tower companies like AMT own the toll booth for the growth of wireless communication today, which requires denser and denser antenna population with each succeeding wireless generation from 2G, 3,G, 4G and now 5G. He has said that the rate of return per incremental tower for AMT (after its been paid for) exceeds 90% - a very powerful business model. AMT is now in 16 countries outside the U.S.
In addition to AMT, Akre also holds SBA Communications Corp (SBAC) in the portfolio, which is another cellular tower company. MasterCard and Visa are other long time holdings of the fund, which Akre thinks have long growth runways ahead of them as the world increasingly shifts to electronic payment solutions.
Concentration
Akre Capital Management leverages the power of concentration in their higher conviction ideas. Their concentration in fewer stocks has grown in recent years in spite of huge growth in their AUM (Assets Under management). The reason for their higher concentration is a reflection of their higher confidence in the stocks in their portfolio. Akre Capital maintains no sell targets on their stocks, just buy targets. After they have acquired a "compounding machine" at a good price, they just give the stocks time to compound over the long term.
Current portfolio
As can be seen below, Akre Capital maintains a concentrated portfolio with low turnover. Some of the established positions were taken almost two decades ago. This is remarkable as a typical mutual fund large cap growth portfolio has a turnover of about 75% over the same time period. The large size of these old positions indicate that Akre expects the stocks to keep compounding well into the future.
Ticker | Company | Price | % portfolio | in portfolio since |
(NYSE:AMT) | American Tower Corp | 227.87 | 15.67 | 2001 |
(NYSE:MA) | Mastercard Inc | 299.2 | 14.26 | 2010 |
(MCO) | Moody's Corporation | 239.06 | 11.47 | 2012 |
(NYSE:V) | Visa Inc | 189.16 | 8.29 | 2012 |
(ORLY) | O'Reilly Automotive Inc | 439.09 | 7.41 | 2005 |
(MKL) | Markel Corp | 1123.65 | 5.98 | 2001 |
(SBAC) | SBA Communications Corp | 241.26 | 5.86 | 2014 |
(DLTR) | Dollar Tree Inc | 92.08 | 5.72 | 2010 |
(ROP) | Roper Technologies Inc | 353.82 | 5.51 | 2014 |
(KMX) | CarMax Inc | 89.03 | 5.45 | 2013 |
(VRSK) | Verisk Analytics Inc | 148.83 | 3.97 | 2012 |
(KKR) | KKR & Co Inc | 29.28 | 3.38 | 2018 |
(BAM) | Brookfield Asset Management Inc | 57.93 | 2.79 | New |
(DHR) | Danaher Corp | 152.82 | 2.36 | 2013 |
(NASDAQ:ALRM) | Alarm.com Holdings Inc | 42.64 | 0.63 | 2015, Adding |
(BRK.B) | Berkshire Hathaway Inc | 226.45 | 0.59 | 2003 |
(PRMW) | Primo Water Corp | 11.55 | 0.37 | 2011 |
(BRK.A) | Berkshire Hathaway Inc | 339650 | 0.13 | 2003 |
(NASDAQ:OLLI) | Ollie's Bargain Outlet Holdings Inc | 66.37 | 0.06 | New |
(GSHD) | Goosehead Insurance Inc | 41.42 | 0.05 | 2018 |
(LAMR) | Lamar Advertising Co | 88.81 | 0.04 | 2013 |
(NASDAQ:DSGX) | The Descartes Systems Group Inc | 42.13 | 0.02 | New |
(ESGR) | Enstar Group Ltd | 208.12 | 0.01 | Sold |
(BOMN) | Boston Omaha Corp | 21.38 | 0 | Sold |
(NYSE:CLNY) | Colony Capital Inc | 4.78 | 0 | New |
(AMTD) | TD Ameritrade Holding Corp | 50.77 | 0 | Sold |
(DHIL) | Diamond Hill Investment Group Inc | 142.37 | 0 | Sold |
(UI) | Ubiquiti Inc | 190.42 | 0 | Sold |
New ideas
Ollie's Bargain Outlet Holdings Inc (NASDAQ:OLLI) is a retailer of brand name merchandise at drastically reduced prices. It operates stores across the Eastern half of the United States. Its differentiated go-to-market strategy is characterized by a unique, fun and engaging treasure hunt shopping experience, compelling customer value proposition and witty, humorous in-store signage and advertising campaigns. Revenue and EBITDA have compounded at a rate of 13% and 20% over the last five years.
OLLI Annual Rates (per share) | 10 yrs | 5 yrs | 12 months |
Revenue Growth (%) | N/A | 13.10 | 14.00 |
EBITDA Growth (%) | N/A | 19.60 | 9.90 |
Operating Income Growth (%) | N/A | 21.60 | 9.00 |
EPS without NRI Growth (%) | N/A | 45.90 | -9.30 |
Free Cash Flow Growth (%) | N/A | 38.80 | -69.20 |
Book Value Growth (%) | N/A | 14.90 | 11.90 |
The Descartes Systems Group Inc (NASDAQ:DSGX) is a Waterloo, Ontario-based provider of software for the transportation and logistics, distribution, manufacturing and retail industries. As the table below demonstrates, its's a compounder par excellence.
DSGX Annual Rates (per share) | 10 yrs | 5 yrs | 12 months |
Revenue Growth (%) | 13.50 | 11.70 | 15.70 |
EBITDA Growth (%) | 18.20 | 17.30 | 25.80 |
Operating Income Growth (%) | 18.70 | 15.70 | 25.40 |
EPS without NRI Growth (%) | 6.20 | 24.10 | 8.40 |
Free Cash Flow Growth (%) | 18.00 | 12.60 | 29.40 |
Book Value Growth (%) | 13.30 | 14.00 | 43.4 |
Akre Capital has recently doubled its position in Alarm.com Holdings Inc (ALRM), a provider of cloud based security and automation solutions. ALRM recently hit a 52 week low due to conservative guidance. Looks like Akre thinks that this weakness is temporary. Revenue and EBITDA per share has compounded at a rate of 17% and 18% over the last five years and the company appears to have a long runway.
ALRM Annual Rates (per share) | 10 yrs | 5 yrs | 12 months |
Revenue Growth (%) | N/A | 17.90 | 16.10 |
EBITDA Growth (%) | N/A | 18.20 | 102.20 |
Operating Income Growth (%) | N/A | 3.50 | 172.30 |
EPS without NRI Growth (%) | N/A | N/A | 242.90 |
Free Cash Flow Growth (%) | N/A | 37.10 | -17.30 |
Book Value Growth (%) | N/A | N/A | 25.50 |
Colony Capital (NYSE:CLNY) is a recent small position and it too early to say if it any more than an experimental speculative position. The stock is at an all time low and is trading below tangible equity.
Conclusion
Chuck Akre (Trades, Portfolio) says that:
"The three areas of analysis - business, management, and reinvestment - are the key components of what we call our "three-legged stool." When we find a business that satisfies all three of our requirements, we refer to it as a "compounding machine," and we seek to purchase shares at a modest valuation."
Akre Capital's new positions give us some good ideas to in our quest to find these compounding machines which we can hold for a long time.
Disclosure: The Author is long Moody's (MCO) stock
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