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
The internet is becoming multi-polar with increasing local regulations. In such a world, a global interconnection provider like Equinix could matter less.
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
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.
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
The company is expensive relative to its growth rate.
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
Can Enghouse continue to execute as it scales?
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! firstname.lastname@example.org