2 investment chiefs who helped swell $65 million in firmwide assets to $940 million describe their Warren Buffett-inspired approach to investing - and explain why traditional market metrics are 'irrelevant'
- Sean Stannard-Stockton - president and chief investment officer at Ensemble Capital - and Todd Wenning - senior investment analyst at the firm - utilize Warren Buffett's stock-picking methodology to fill their portfolio with 15 to 30 high-conviction businesses.
- The investment duo make it a point to focus on idiosyncratic businesses, high returns on invested capital, sustainable competitive advantages, and "capital light compounders."
- It's an approach they say renders traditional market multiples "irrelevant."
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It's safe to say that the majority of fundamental investors try to channel at least some aspect of Warren Buffett's methodology when it comes to stock picking. After all, the Oracle of Omaha has been trouncing markets for decades on end.
Sean Stannard-Stockton and Todd Wenning are two investors that are cut from the same cloth as Buffett. At Ensemble Capital, Stannard-Stockton serves as the president and chief investment officer, and Wenning a senior investment analyst.
Both channel Buffett's investment style in order to identify the 15 to 30 companies that will occupy a spot in their portfolio - each with a high degree of conviction.
"For us, it's really three things have to be there," Wenning said on The Acquirers Podcast. "There has to be a moat, there has to be good management, and we have to understand the business."
That's nothing new. It's classic Buffett criteria - and it helps to remove some of the ambiguity around forecasting a company's future cash flows and sustainability.
The duo make it a point to seek out the most competitively advantaged businesses (moat) with an emphasis on high returns on invested capital. And they practice what they preach.
Some of Ensemble's larger positions include: First Republic Bank (FRC), Booking Holdings (BKNG), Alphabet (GOOGL), Ferrari (RACE), and Netflix (NFLX).
But the two capital allocators' analysis doesn't stop there.
"What we look for most - what our portfolio is most populated with - is what we call 'capital light compounders,'" Stannard-Stockton said. "Businesses that are able to grow without reinvesting a lot of cash into their business."
Mastercard (MA) - one of Ensemble's largest holdings - is provided as a prime example of this notion.
"The business just relentlessly is growing the top line in the double-digits for many years," Stannard-Stockton said. "But it doesn't need to reinvest in the business because there's not a lot of capital required to bring on more credit card payers onto a network they've already built."
The chart below from Ensemble Capital provides a more detailed visualization of how they apply this confluence of variables to decision making.
Ensemble CapitalWith all of that under consideration, Stannard-Stockton and Wenning take Buffett's methodology a step further, employing a few other unique metrics to determine a potential purchase.
"Todd has coined a phrase here: idiosyncratic business," said Stannard-Stockton. "I think it really gets at the sorts of businesses that we look for and why things like peer multiples and traditional market multiples is really irrelevant to the work that we do."
Wenning added: "What we find is that there's opportunities a lot of times in companies that kind of straddle two different industries."
This notion allows the pair to view potential purchases differently than many industry-specific analysts might, leaving potential overlooked opportunities ripe for the picking.
Wenning provides Ferrari - the firm's fourth largest position - as a prime example of this overarching idea.
"That might be assigned to an auto analyst," he said in reference to Ferrari. "But, in reality it's really a both a luxury firm and an auto."
Ferrari toeing the line between a luxury good and an automaker creates dislocations in valuations and outlooks to the untrained eye. The exact type of opportunity the duo looks for.
