These “stable cash generators” comprise 47% of my portfolio as of 9/30/2020.

These 4 companies aren’t growing particularly fast, but I like the risk-reward trade-off.

It is unlikely that any will double in 6 months. But the chance of permanent loss of capital is low.

In a downturn, these businesses should do fine.

Equinix – NASDAQ: EQIX – (26% of portfolio as of 9/30)

• Equinix is a US company that operates global “Interconnection facilities”— locations where the internet physically connects
• Imagine the pipes that carry data across the internet. These pipes come into an Equinix facility. Within each facility, enterprises can connect directly to one another
• Enterprises have a lot of reasons to share data, and those reasons are growing
• For these enterprises: latency matters, proximity matters, and having a one-stop shop matters.
• As a result, Equinix is the dominant global provider and enjoys winner-take all network effects and customer lock-in

Key risk(s):

The internet is becoming multi-polar with increasing local regulations. In such a world, a global interconnection provider like Equinix could matter less.

Valuation

You are paying $23 today for $1 of adjusted funds from operations 3 years from now. (I assumed 10% annual growth)

(Most recent EQIX investor deck)

Slate Grocery REIT – TSE: SGR.UN – (11%)

• Slate Grocery REIT (SGR) is a Canadian company that owns grocery-anchored real estate across US suburban areas
• Their most recent rent collections through COVID have been relatively steady at 90%+
• On the downside, the company’s cash flows are currently not growing
• But they have plenty of liquidity
• My hypothesis is that SGR will eventually recover to pre-pandemic levels, and their sizable dividend will remain reasonably steady and afford me time to wait

Key Risk(s):

While SGR doesn’t operate grocery stores, the more anchor tenants they have, the better. Amazon is a perpetual threat to the grocery industry given their Whole Foods acquisition + Amazon Fresh. And in the longer run, digital grocery delivery could disrupt the industry entirely.

Valuation

You are paying $8 today for $1 of adjusted funds from operations 3 years from now. (I conservatively assumed 0% annual growth)

(Most recent SGR investor deck)

Constellation Software – TSE: CSU – (5%)

• Constellation Software is a Canadian-based company that acquires and grows vertical software businesses mostly in North America but expanding globally—especially Europe
• Vertical software means selling software tailored to the needs of a specific industry (I.e. utilities, hospitals)
• Generally, vertical software is a great business to be in given that the product, once installed, becomes critical for the customer. And switching costs become very high
• As a result, you have predictable, recurring revenue with high margins and annual price increases. Costs are predictable too
• Management is superb. For decades, Constellation has executed nearly flawlessly

Key Risk(s):

The company is expensive relative to its growth rate.

Valuation

You are paying $55 today for $1 of net income in Year 3. (I assumed 10% annual growth)

(No deck but CEO Mark Leonard has published annual letters that reflect his intellect and clarity)

 

Enghouse – TSE: ENGH – (3%)

• Similar to Constellation, Enghouse is a Canadian-based company that acquires and grows vertical software businesses mostly in North America but expanding globally—especially Europe
• Again, vertical software is a great business model
• Management seems cut from similar cloth as that of Constellation
• Relative to its larger “cousin”, Enghouse is less proven but the playbook seems similar
• Relative to Constellation, Enghouse is growing faster, but priced more cheaply

Key Risk(s):

Can Enghouse continue to execute as it scales?

Valuation

You are paying $30 today for $1 of net income 3 years from now. (I conservatively assumed 10% annual growth)

(Most recent ENGH investor deck)

Disclaimer: I am not a registered investment advisor. Nothing I write should be construed as investment advice or the solicitation of investment.

Why I write about my portfolio and specific stocks

I want you to challenge my beliefs. I’d love for you to tell me what I’m missing. I want you to tell me about public companies that I may not know about. And I’d love for you to teach me more about the companies that I already know.

Next article: Stock bucket #2 – Fast growing beasts

Drop me a line if you have any questions / comments or just want to get in touch! yz@yishizuo.com