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Steven Chen
Steven Chen
Articles (184)  | Author's Website |

The Compounding Superheroes: International Edition

Our list of high-conviction names that compound shareholder value

In this article, we continue our exploration for compounding superheroes based on our preset criteria and handpick four more stocks using this strategy, this time choosing from international markets. In order to be considered a compounding superhero, a stock must meet the following requirements:

1. Have a three-year incremental return on equity that is above 50% and surpasses the return on equity from recent years.

2. Have management that is committed to reinvesting a sizable portion of earnings.

3. Display a promising market share opportunity or industry tailwind.

4. Demonstrate a clear growth strategy that remains steady.

It is interesting to see how these companies maintain such a super-normal incremental return on equity. Theoretically, the long-term shareholder return would not be far from that incremental return as long as the management keeps finding the opportunities to deploy additional capital from retained earnings.

Check Point Software Technologies

Israel-based Check Point Software Technologies (NASDAQ:CHKP) is one of the leading providers for cybersecurity solutions. According to Statista, the global cybersecurity market is predicted to grow from $167.1 billion in 2019 to $248.26 billion by 2023, attaining a 10.4% CAGR. Riding the industry tailwind, Check Point has been reinvesting its earnings in research and development to keep its products state-of-the-art. More recently, it has incresased its sales force with the aim to defend and gain market share.

Based on our calculations, Check Point delivers a three-year incremental return on equity of 73%. Over the last three years, the company earned a return on equity of roughly 22% every year while increasing its equity capital by 4% in total. Over the same period, it retained all its net income but deployed a sizable amount of the free cash flow to buy back shares.

Kakaku.com

Tokyo-based Kakaku.com (TSE:2371) is a major Internet conglomerate in Japan. The company owns and operates a range of platforms and services, including the namesake shopping support site and Japan’s leading restaurant discovery and reservation site, Tabelog.

Kakaku.com benefits from the expanding digital world. The business relies on building and acquiring new products as well as improving the features and popularity of its existing products to fuel long-term growth. These investments appear to have worked well, as the company delivers a three-year incremental return on equity of 59%. During the three-year period, Kakaku.com earned an annual return on equity between 44% and 46%, while increasing its equity capital by 21% in total. Typically, 40-50% of earnings are paid out as dividends.

ATOSS Software

Germany-based ATOSS Software (XTER:AOF) is a market leader in the workforce management software space, which covers the digital management of time and attendance, task, schedule and absence. According to Statista, this particular niche is growing at 4% annuall, driven by the digitalization of the labor world, increasing complexity in regulation, scarcity of qualified human capital and the globalization and decentralization of the corporate world. On the top of the industry tailwind, ATOSS Software invests in international expansion and research and development (e.g., cloud transformation).

For the last three years, ATOSS Software earned a 75% incremental return on equity capital. At the same time, the business generated an annual return on equity between 48% and 51% and retained nearly 50% of its net income.

Softcat

UK-based Softcat PLC (LSE:SCT) is a leading reseller of a comprehensive range of infrastructure technology solutions, working as the middle man between vendors like Microsoft and Apple and end-users (mostly small- and medium-sized enterprises). The company is in a highly fragmented industry, which is expected to grow at a mid-single-digit compound annual rate through 2023. Additionally, the number of customers and the share of the wallet also indicate additional room for growth in terms of the customer base and revenue per customer at Softcat.

To drive growth, the company focuses on investments in scale and capability. The incremental return on equity over the last three years is an astonishing 270%. The equity capital increased by 18% in total during the period. The company returned most of its free cash flow to owners through regular and special dividends.

Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We own shares of Check Point Software Technologies and Kakaku.com.

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About the author:

Steven Chen
Steven CHEN is a quality-focused investor (with bottom-up opportunistic approaches), an ex-hedge fund analyst on Wall Street, a serial entrepreneur, computer scientist, and free-market capitalist.

Steven is the Managing Partner of Urbem Partnership, a value/quality-focused investment partnership fund (www.urbem.capital).

Steven can be reached at [email protected] or through LinkedIn.

Visit Steven Chen's Website


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