🚀 The Best of The Compounding Tortoise

Our 25 most-read blogs to get started with high-return low-risk quality investing

As we approach a milestone of over 250 blogs, deep dives, webinars, and earnings recaps since launching our Substack in early January 2024, we thought it would be helpful to highlight the 25 most-read pieces that best capture our strategy and the analytical rigor behind it.

One of the most common questions we get is: Where should I start?

Whether you're a free reader or a paid subscriber, this curated list is a great starting point. These posts lay out the core principles of our approach and offer a clear view of how we think about markets, valuation, and long-term investing.

We’ve pinned this article to the homepage so it’s always easy to find, especially for new readers just getting started.

(click on the titles to get directed to the article/webinar)

1️⃣ Constellation Software - Deep Dive

In terms of page views, our December 2024 report on CSI far surpasses all other in-depth analyses we've published to date. The deep dive discussed the following topics:

• Introduction to CSI - Decentralization & Track Record

• Organic Growth vs. M&A

• Incentives and Management Team

• ROIC vs. ROIIC vs. IRR - Smaller vs. Larger M&A Deals

• Spin-Outs: TOI and LMN - Impact on FCFA2S

• Year-to-Date Performance

• Looking Ahead

• Base Case Valuation Model - Drivers and Risks

• Conclusions

2️⃣ The Rinse-and-Repeat Strategy of Serial Acquirers

When searching for Compounding Tortoises, serial acquirers have proven to be a good starting pool for further screening. Coupled with organic growth, these vehicles can keep on growing at a double-digit clip, just by acquiring new companies.

The best serial acquirers are run by very competent management teams who prioritize entrepreneurship and corporate culture above short-term thinking. As their collection of subsidiaries grows, decentralization is the ultimate way of providing ever-lasting autonomy to the acquired entities. Therefore, serial acquirers don’t just have to be financially strong, but they should also have a durable cultural spirit that’s very hard to replicate.

This blog serves as a brief introduction to the serial acquirer model.

3️⃣ Harvia - Deep Dive

Harvia is now our largest position, and our September 2024 deep dive was very well received. Amongst other things, we talked about the trends in the global sauna market, Harvia’s IPO, the nuances around reported return on invested capital, and its M&A track record.

4️⃣ Ferrari - Deep Dive

Our latest deep dive highlighted Ferrari, an in-depth report we greatly enjoyed writing. The chapter on its reinvestments into R&D, and the implications on the steady-state valuation is especially worth reading.

• Part I - Where it All Started for Ferrari

• Part II - Business Segments

• Part III - Staying Ahead of the Competition

• Part IV - Product Portfolio

• Part V - Financials

• Part VI - Reinvestment Pace

• Part VII - Meeting the 2022 Capital Markets Day Targets

• Part VIII - Base Case Valuation

• Part IX - Risks & Uncertainties

• Part X - Conclusions

5️⃣ How We Define Sustainable Quality Compounding (Part 1)

In this three-part blog, we’ll tie all pieces of sustainable quality compounding together by discussing six companies: Harvia, Copart, TJX, Tractor Supply, Pool Corporation, and Atkore.

This first article was devoted to Harvia, as it is our largest position and given its fairly sizable capacity investments over the course of Q2 - Q4 2021, a few months before the post-COVID normalization kicked in. The timing couldn’t have been worse to execute on these late 2021 growth investments.

It’s impossible to have predicted the COVID-19 pandemic and the profound impact it had on businesses. Many high-quality companies have lost their compounding status, e.g. Nike and Estée Lauder, despite their solid track record and ROIC. That’s exactly why only looking at ratios such as rolling ROIC (a lagging indicator) will result in an opaque investment case.

The more relevant question is: what’s the impact of a downturn, i.e. not using that capacity for 4 years in a row? The results for Harvia may surprise you, and they’re exactly the reason why this company is our highest-conviction position: highly efficient and effective quality compounding. It’s resulted in a 37% CAGR over the past 5 years. And to us, there seems to be a lot more heat left ;-)

6️⃣ How We Define Sustainable Quality Compounding (Part 2)

In this blog, we’ve discussed the impact of leasing on the traditionally calculated ROIIC for retailers and other companies. Our thought process highlighted The TJX Companies, which is the leading off-price apparel and home fashions retailer in the US and worldwide, with a staggering track record well-isolated from the e-commerce threat. We also shed light on Tractor Supply and its recent same-store sales growth.

7️⃣ Partner Q&A (#1) - on Net Financial Position, ROIIC and our Valuation Model

Investment jargon and calculations can be a little deceiving, hence we'd like to break them down in these series. Some members would say: why clarify a seemingly simple concept (for instance NFP/net financial position), while others would highly appreciate this additional color. We believe a Q&A series are particularly helpful as many members are likely to remain silent if they have a question.

One of the main objectives (and hopefully differentiators) of our newsletter is to not only share information, but to help you better understand the ins and outs of durable shareholder value creation (and its pitfalls). It's about debunking financial information rather than believing the raw data from screeners is sufficient to make informed decisions. We shouldn’t just take numbers for granted, but contextualize what they’re made up of.

8️⃣ Partner Q&A (#2) - Nuances on Modeling Steady-State NOPAT

The second blog on our premium members’ questions relates to ROIIC, organic reinvestments, past years’ ROIIC, modeling assumptions, our definition of steady-state NOPAT, and calculating the projected CAGR.

“Steady-state" NOPAT refers to the net operating profit after tax a company would earn if it made no further growth-related capital expenditures. In this context, depreciation should reflect only maintenance capex, excluding depreciation from recent growth investments.

9️⃣ Why the ROIIC + Growth + FCF Optionality Framework is Underappreciated

After reading this blog, some subscribers expressed how eye-opening it was to see ROIIC, growth, and FCF come together. In particular, they’ve learnt that not all growth is valuable.

1️⃣0️⃣ Why Seemingly Undervalued Investment Cases Don't Pan Out: Reality vs. Theory

In this article, we shed light on a company that used to be in our investable universe following the COVID-19 pandemic and appeared to be undervalued: Delta Plus. It’s a French family-controlled small cap business, engaged in developing, manufacturing, and distributing personal protective equipment. It provides head protection products, including eyewear, skull, hearing, and respiratory protection products; and hand protection.

1️⃣1️⃣ Buy-And-Monitor Instead of Buy-And-Hold-Forever

How do we approach long-term investing? Buy-and-monitor (and preferably, optimize) instead of buy-and-hold-forever.

When running a concentrated portfolio, we have to be proactive: businesses change, their returns on incremental invested capital aren’t consistent, their reinvestment runway will grow or shrink as new trends and competitors emerge… As of May 16, 2025, our top 3 positions now account for 67% of total portfolio value. That’s indeed concentrated, but it’s focused on what we believe to be just amazing businesses, and we'll continue to share our journey very transparently.

1️⃣2️⃣ When Selling Decisions Teach Us Valuable Lessons

In this blog, we touched on the concept of “selling decisions” - when and why do we look to sell a stock? Two relatively straightforward instances:

• Valuation has become excessive, and we see a clearly better multi-year risk/reward profile in another stock (preferably, a name we already own/cover), considering all tax consequences. Excessive means that the real return outlook is expected to become very volatile and below our target. Fortunately, for valuations to get really excessive, a lot of bullishness must be priced in, and generally speaking, we’ll hold onto fairly to slightly overvalued compounders for as long as possible.

• Or we’ve simply lost conviction, and find it difficult to model the growth path forward.

Selling because the thesis’s changed is tough; it’s essentially telling ourselves that we were wrong…

1️⃣3️⃣ Calculating ROIC for a Serial Acquirer (Lifco)

There’s a lot of confusion around ROIC, and even more so when dealing with serial acquirers. We have seen that many investors use reported book value of invested capital, which leads to an overly optimistic ROIC given the treatment of acquisition-related intangibles. Also, while NOPAT is based on cash taxes, an artificially and unusually low tax rate will distort the ROIC outcome.

1️⃣4️⃣ Valuing Quality Growth Companies

From time to time, we receive quite a bit of questions on how to value quality companies, and how to gauge the economic returns of capital allocation. While valuation is a subjective topic, we stick to our favorite metric, namely steady-state NOPAT. In fact, we tweeted about it earlier today.

Free cash flow is an after-investment metric, which would severely penalize good companies investing at returns exceeding their cost of capital. A low free cash flow yield would also make comparisons to the risk-free rate meaningless.

We view steady-state NOPAT as the pile of cash a company would have if it 1) stopped reinvesting for future growth, and 2) made only maintenance investments, both in physical assets (machinery, factories, leased assets (lease repayments) and intangibles (IT, capitalized R&D). Think of it like a fixed coupon you’re getting from fixed income investments.

1️⃣5️⃣ It's Buy-and-Monitor, Not Buy-and-Hold

This blog talked about the nuances of gross return models, such as DCFs which typically aren’t adjusted for withholding taxes, or the fact that excess free cash may not be returned to shareholders.

Companies that don’t need to hold much permanent cash tend to be true industry leaders, miles ahead of their competitions. They can do whatever they want, which could be harmful to future returns if you have a reshuffle at the top management team.

In short, we favor the buy-and-monitor approach: keep track of your companies’ performance and capital allocation. And if something doesn’t seem right, reconsider your thesis. Don’t become anchored to past theses and/or your favorite companies. That’s already in the past, and we’re buying the future returns. Companies evolve, and so will your investment thesis.

Don’t invest in companies whose management teams always talk about past triumphs rather than future strategic, competitive positioning and value creation for the next years/decade.

1️⃣6️⃣ Serial Acquirer Report September 2024

Our first report on 10 serial acquirers covers more ground on what’s essential to a serial acquirer’s longevity and how investors can separate the wheat from the chaff. We’ve expressed our concerns around M&A quality for Indutrade, Teqnion’s cash flow volatility and how its defined EBITA is completely off.

1️⃣7️⃣ Key Lessons from Chuck Akre

It’s thanks to Akre’s fund that we’ve learned about the existence of O’Reilly Automotive and other steady winners that have surprised positively over many years. Chuck Akre's investment philosophy centers on identifying businesses with high potential for compounding returns over long periods, underpinned by his renowned "three-legged stool" framework.

1️⃣8️⃣ The 12 Best No-Nonsense Lessons from Mark Leonard (Constellation Software)

When a Chairman's statement starts with: "One of our directors has been calling me irresponsible for years..." you know it's gonna be an interesting read. Who wrote this? Mark Leonard, the founder and current CEO of Constellation Software. We like managers who think out of the box and make decisions that only fit in the "Shareholder Value Creation" framework, i.e. ROIC, reinvestment rate and distributing any leftover cash back to shareholders.

1️⃣9️⃣ Will Our Quality Growth Companies Mean Revert?

As quality growth investors, our focus is straightforward: we seek growing companies. But how much growth should we aim for, and which growth rates are prone to mean reversion? While exceptional growth often reverts to the mean, the opposite is typically true for ROIC, which remains a key factor in sustaining steady shareholder returns. If our companies can reinvest a bit more than anticipated, it will provide a notable upside to initial assumptions.

As McKinsey’s book on Valuation states:

The returns of the best-performing companies do not decline all the way to the aggregate median over 15 years. High performing companies are in general remarkably capable of sustaining a competitive advantage in their businesses and or finding new business where they continue or rebuild such advantages. This pattern is stable over time - even over the most recent 15 years, which included the 2008 credit crisis. Since a company's continuing value is highly dependent on long-run forecasts of ROIC and growth, this result has important implications for corporate calculation. Basing a continuing value on the economic concept that ROIC will approach the weighted average cost of capital (WACC) is overly conservative for the typical company generating high ROIC.

The article highlighted the stability of value creation, providing practical examples of companies within our portfolio to illustrate this concept.

It’s unrealistic to believe that a company with a 30% organic ROIIC can indefinitely reinvest all excess cash back into the business. Eventually, the law of large numbers will catch up, with the size of investments causing delays before incremental invested capital starts impacting the top line and NOPAT. At some point, the company would outgrow its total addressable market, and ultimately, the broader economy. Of course, it’s preferable to have a 30% ROIIC with a lower reinvestment rate than a 10% ROIIC with a 100% reinvestment rate. Higher inflation and supply chain issues would erode the latter strategy, leading to increased volatility in stock prices and making it difficult to forecast reasonable assumptions.

2️⃣0️⃣ Managing Expectations: Short-Term Comparisons and Headline Numbers

Over the past couple of years, we’ve experienced several economic shocks: COVID-19, inflation, interest rates, wars et al. For most companies, these events made year-over-year comparisons quite meaningless in 2022 and 2023.

Still, many analysts and investors continued to filter through the quarterly reports, adjust their short-term valuation models to justify low or high share prices (that’s what price targets are all about) and bombard management teams with short-sighted questions (as if they had a crystal ball on what would come next). As we’re definitely going to have to withstand many more shocks over the next years, how should we deal with these external factors? How will they impact our modeled investment returns?

This year, we believe the luxury sector’s doldrums present opportunities for long-term investors who look past tough post-COVID comparisons. Now that we’ve lapped many elections’ uncertainty, there are early indications that growth will pick up in 2025.

2️⃣1️⃣ Our Secret Sauce to Finding Great Compounders

Rather than saying: look for high-ROIC companies and you’ll be fine, we argue that there’s a lot of hidden value in picking those that have a strong ROIC (our hurdle is >25%) and whose competition does not. “Moaty” sectors are not necessarily the best places to look for steady outperformance throughout the whole cycle (just look at tech in the 2022 bear market despite generally favorable margin characteristics, capital-light business models and growth prospects).

When you’re able to achieve an ROIC that’s double or even triple your next close-in competitor’s, you’re doing something special: you possess some unique characteristics that will enable you to accelerate shareholder value creation when reinvesting cash flows back into the business.

Operating in an industry where you have many competitors that share the same ROIC and growth characteristics can come with greater risks. The theory is that as long as the ROIIC exceeds the capital’s opportunity cost (risk-free rate and risk premium) all growth initiatives should be undertaken. Hence, there could be an incentive for high-ROIC to compensate for temporarily lower growth by investing more aggressively (lowering price) to take market share.

2️⃣2️⃣ When ROIC is a Flawed Metric - Part II

What we’ve seen over the past years is that many capital-light (low working capital and low maintenance CAPEX) and high-margin companies managed to dramatically improve their reported ROIC. That’s obviously a testament to their effective capital management and competitive advantages, but using that ROIC as a baseline for modeling returns on future growth investments is tricky.

We’re interested in three elements:

1. Returns on incremental invested capital (ROIIC) excluding extraordinary events such as supply chain constraints leading to year-over-year volatility (although a structurally higher inventory position should be accounted for, i.e. lower ROIIC).

2. Longevity of these returns: we don’t want these returns to vanish within 3 years. Post-COVID, many commodity-based companies enjoyed unprecedented margin expansion which didn’t last. Hence, their temporarily elevated returns proved to be unsustainable, leading to - at least initially -overly optimistic assumptions on ROIIC.

3. Quick contribution of investments to the top-line and NOPAT. If it takes 10 years to ramp up a project that will yield an ROIIC of 20%, the final un-levered IRR will fall short of expectations.

The investment crowd has gone all-in on the ROIC narrative, but there are many moving parts: inflation inflating profits while the initial cash outlay on long-term assets (e.g. plants) remains relatively stable.

When modeling future cash flows and growth, we’re looking at the returns on incremental invested capital. That is, investment needs based on today’s so-called new-build cost.

Digging deep in a company’s asset base, cadence in prior years’ inflation and other factors lead to a more nuanced/prudent view on ROIC vs. ROIIC.

2️⃣3️⃣ Why Excellent Working Capital Management is So Underrated

Working capital management is one of the most important responsibilities of finance managers. It’s quite easy to understand why running with too much working capital isn’t ideal: cash is simply being tied up.

It could highlight some financial distress (aging receivables), unfavorable supplier payment terms (not playing from a position of strength), carrying too much inventory in product categories where you don’t want to see it (i.e. retailers in more discretionary merchandise after the post-COVID tailwinds had started to fade).

If your business experiences sizable swings in working capital, it could lead to a permanent lock-up of cash which some would view as “excess” liquidity.

What Einstein said about compound interest (he who understands it, earns it… he who doesn’t, pays it) is applicable to very working capital efficient companies. And our portfolio holdings are very good at it (to say the least).

2️⃣4️⃣ Sources of High-Quality Growth

Companies can grow too quickly with several hiccups and thus subsequently higher volatility in their share prices. High growth rates are like a honey jar: they attract competition, tend to lead to reduced returns for all parties looking to get a bigger piece of the pie.

Plus, there’s plenty of empirical evidence that fast growers (or at least, investors expect them to meaningfully accelerate top line growth, i.e. the expectations treadmill) are prone to severe overvaluation. It’s not just about timing a reversal in sky-high growth rates but also factoring in the potentially devastating impact from substantial multiple contraction. Research conducted by McKinsey demonstrates why boring wins the race.

This article discussed sources of high-quality growth, and how high ROIC companies can keep growth initiatives going for quite a long time.

2️⃣5️⃣ Our Favorite Tool to Buy Great Quality Companies During Market Corrections

We’ve received quite a lot of questions on when to buy the dip in the stock market. It’s a relevant topic as building wealth in the stock market is a process of buying high-quality growth companies, adding capital to those along the way and keeping your personal risk tolerance in check.

Remember, our goal is to own a portfolio that delivers strong risk-adjusted returns throughout the whole cycle. During periods of economic uncertainty and heightened, we’re here to prove the resilience of our portfolio strategy, that’s where the edge should come from: outperforming during corrections. It’s interesting to notice the increased interest in our Substack over the past month, at a time of more stock market volatility.

As we look at our current portfolio, there will always be opportunities to top up certain positions. Whilst we cannot predict the future (and we’re not even trying to), staying disciplined with periodic purchases can be done through a very simple tool: the VIX index, with the usual caveat that nobody knows what will happen.

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Here you go: 25 blogs to become comfortable with our enhanced quality growth stock portfolio, aimed at generating high returns with low risk.