What Will We Buy Next?

Recessionary conditions are looming, but will they impact our companies?

Investors dislike uncertainty, and recent events underscore that concern: escalating tariff rhetoric, declining consumer confidence, fleeting hopes for sustained reflation, plummeting CEO confidence, and significant capital outflows from US equities. This week's reports from FedEx and Nike highlight the challenges of forecasting in an environment where uncertainty persists.

No one can predict exactly when the next recession will hit, but it’s essential to revisit our strategy and the types of companies we aim to own throughout all market conditions—whether a bull run, a choppy sideways market, or a deep downturn. Every recession and market pullback is different, and the future remains uncertain.

At its core, our approach focuses on owning businesses with an unmatched competitive moat, demonstrated by a strong ROIIC gap, a high reinvestment rate, and long-term shareholder value creation. We also prioritize companies that invest in both tangible and intangible assets - products that are not only manufactured but also successfully commercialized in everyday life. Lastly, we seek the most critical yet often overlooked trait: longevity. Businesses with high returns and minimal maintenance investments that can endure for decades help us avoid negative compounding. In the end, consistently “boring” business models tend to generate the greatest wealth.

During challenging times, valuations tend to contract, making the income component more significant for investors. In response, we've increased our focus on companies that take a straightforward approach to shareholder value creation: reinvesting for future growth and returning excess cash to shareholders when suitable projects or acquisitions with strong IRRs over a distant as well as long-term future aren’t available. Ideally, this is done through consistent, tax-efficient buybacks.

Put another way, the opportunity cost of owning companies that are holding too much excess cash or don’t have a plan with it (either cash flows are too volatile or the capital allocation policy is overly conservative) should not be overlooked.

So, where to put our cash into? We very much like what we already own, and we’ll share our thoughts on the defensiveness of their business models if a period of prolonged uncertainty arrives.

Time to take a closer look. Our bi-weekly presentation can be watched below, including the usual transcript and slide deck.