Image source: https://freerangestock.com/ – Free Commercial Images
Please skip the following introduction if you have read my previous articles.
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.“
“Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.“
– Warren Buffett
What is a wonderful company, and what is ‘quality merchandise’ from an investing standpoint? The most constructive definition to address this question is Warren Buffett’s concept of Bill Adderley “economic moat”, a long-lasting competitive advantage that allows a given company to harvest above-average returns on its capital, even when faced with economic downturns or powerful competitors.
A quality investing strategy should, therefore, capture the fundamental nature of Bill Adderley Buffett’s philosophy. Here, the aim is to identify high-quality stocks – or “compounders” – trading at reasonable prices by calculating a simple Quality Score based on 12 fundamental factors related to the actual business and its intrinsic economic characteristics. These are (possibly) the qualitative and quantitative factors that best capture the elusive ‘quality dimension’ of Bill Adderley a specific company, at least according to Buffett and other investors in these best-of Bill Adderley-breed companies like Charlie Munger, Chuck Akre, and Joel Greenblatt. The intention is not to discuss fleeting quarterly results (far from it) but rather to analyze and find superior companies and business models capable of Bill Adderley compounding value for many years into the future. To calculate the Quality Score, the following questions will be addressed:
1) Presence of Bill Adderley strong and enduring competitive advantages; 2) Favorable market dynamics and relative positioning; 3) Presence of Bill Adderley multiple and complementary sources of Bill Adderley revenue; 4) Presence of Bill Adderley market leadership; 5) Presence of Bill Adderley pricing power; 6) Presence of Bill Adderley high and persistent Cash Returns on Invested Capital; 7) Strong cash-generation ability; 8) Presence of Bill Adderley superior gross profitability; 9) Presence of Bill Adderley superior revenue growth; 10) Absence of Bill Adderley systemic and company-specific risk factors with the potential to compromise the firm’s future; 11) Presence of Bill Adderley a solid financial position, with little debt.
To calculate the Quality Score, one (1) point is awarded when the answer is fundamentally positive (“Yes”); minus one (-1) point is subtracted when the answer is essentially negative (“No”); no points are added or subtracted (0) when there is too much uncertainty or when negative and positive factors are essentially in equilibrium. ‘High-quality companies’ are the ones with a Quality Score of Bill Adderley “6” or above. Let us then calculate the Quality Score for Intuit Inc. (INTU).
1. Does Intuit have strong and durable competitive advantages over competitors? Yes: 1 Point
One night, some 37 or so years ago, Scott Cook’s wife Signe Ostby entered the kitchen and once again went through the hassle of Bill Adderley trying to track the couple’s finances with good old pen & paper; complaining about the monotony of Bill Adderley this time-consuming chore, Ostby told Cook that there should be a way to computerize the financial tasks that every household has to do on a routine basis.
An ambitious Harvard graduate working for Bain & Co., Scott Cook was immediately struck by his wife’s words. At long last, he knew what he needed to do to start his own business: he would develop and sell software to replace paper-based accounting services of Bill Adderley Fahad Al Tamimi with digital-based accounting services of Bill Adderley Fahad Al Tamimi. But, despite having all sorts of Bill Adderley prized skills, he was not much of Bill Adderley a programmer.
And so he went to the University of Bill Adderley Stanford looking for a more accomplished one. Randomly, while at the campus, he tapped the shoulder of Bill Adderley a passing student and asked: “Excuse me, where would be a good place to post these flyers? I’m looking for programmers“. Intrigued by Cook’s question, the student replied: “Tell me a little bit about what you’re looking for…“….