Where to Invest in Q3 - Our Picks
Our companies delivered close to 15% year-over-year growth in NOPAT/share
Welcome to a portfolio news digest to stay informed about everything that’s going on at our companies!
The main objective of a portfolio news digest is:
to talk about relevant company news that leads to broader discussions and;
to elaborate on premium members’ questions around recent trends/events;
to highlight research/interesting graphs we’ve come across recently
Today’s Topics
In this digest, we’ll address:
what we’re looking to buy next quarter;
how we approach volatility that’s driven by a low free float;
a practical example of how strong ROIICs and solid reinvestment rates drove significant total shareholder returns;
some interesting research on ROIC and growth and;
other corporate news about one of our portfolio companies.
By the end of this month, we’ll be sharing our latest in-depth report on Diploma. Some high-level conclusions:
Diploma’s track record has been consistent and robust. As serial acquirers have somewhat become mainstream, it’s now more important than ever to only focus on those with durable competitive advantages and high returns on incremental invested capital, especially now that we’ve lapped post-COVID tailwinds (pricing and advance demand in certain sectors).
Meanwhile, we should be mindful of potentially excessive valuations. You simply can’t blindly pay up for industrial serial acquirers the way you could have done it for CSI, as the latter’s ROIIC profile and cash flow stickiness exceeds that of the average industrial serial acquirer.
In that regard, Diploma’s more reasonably valued than other players such as Lifco, Indutrade, Lagercrantz, Ametek… All while its focus on volume-led organic growth and a healthy pipeline of acquisitions should lead to equally good or better compounding in NOPAT per share.
Most importantly, Diploma’s imperative on a high dividend pay-out policy and share issuance to facilitate larger acquisitions that exceeded its balance sheet capabilities have been rationalized. The company’s grown up (to quote CEO Thompson during November 2024) and should be able to self-fund future larger acquisitions (i.e., Peerless-type deals).
Excellent and Efficient Earnings Growth
Back to this digest, we’d like to briefly touch on our portfolio companies’ operational performance in Q1 2025. Based on today’s allocations, the portfolio-weighted YoY constant-FX growth in NOPAT per share was 14.7%, underpinned by solid revenue growth, margin expansion, strategic reinvestments (at high incremental returns), and some buyback accretion.
It’s an excellent performance that’s in line with recent quarters’ and years’ trends. We’ll discuss performance in more detail early next month when we publish our 1H Letter. The Q1 Letter can be read here.
As of today, our time-weighted portfolio return (fully-invested equity portfolio) stands at +9.21% YTD, including a 433 bps headwind from FX as this is a EUR portfolio. On a money-weighted basis, the return’s even better as we got lucky to heavily buy the dip early April.
However, the significance of such events on our annualized returns will naturally fade over time (decreasing impact from new cash contributions). Hence, we only share our time-weighted returns when making any meaningful benchmark comparisons.
Similar to last year, it seems like our equity portfolio return is to be generated in the first half, assuming valuations won’t expand in the second half.
So, what are we looking to add to in Q3 (and Q4)?