Geoff Gannon

GEOFF GANNON

Geoff Gannon

Co-founder / Portfolio Manager

 

2005: Started Gannononinvesting.com blog (age 20)

2006: Gannononinvesting stock newsletter

2008 – 2011: Freelance investment writer

2012: Gurufocus employee

2013 – 2016: Singular Diligence newsletter

2017: Co-founded Focused Compounding website

2018: Launched Focused Compounding Managed Accounts

2019: Partnered with Willow Oak Asset Management to launch The Focused Compounding Fund 

Should I Specialize in an Industry I Know – Even if it’s a Bad One?

A 12-minute read Hi Geoff,   I think you have touched on this before but I will ask a bit more detailed. Do you think it’s better to be an expert on one industry and the stocks within that industry vs knowing a little about many industries? What about if that industry is a “bad” industry like shipping? Would you still think an investor is better off knowing everything about that industry and the stocks vs being a generalist? I guess that having a deep

Which Kind of Investor Could You Aspire to Be: Graham, Fisher, Lynch, Greenblatt, or Marks?

Hi Geoff,    I am very new to investing and I have most of my savings invested in Vanguard S&P 500. I would love to learn more about the world of investing but I just don’t know where to start. Could you please give me a roadmap to begin?   Geoff’s Advice to a Brand New Investor   You Need to KNOW YOURSELF First, So…   It really depends on what approach would work best for you. You should read about the investor who most

What Makes a Business Durable?

What Makes a Business Durable? Hey Geoff, I noticed in one of the recent videos you mentioned that the durability of the business matters more then the returns. I believe you were answering a viewer question on return on capital for the subject matter. When you mention durability are you talking about recurring revenue, sustainability of the business going forward (like waste collection industry or railroads etc…)? Answer: A Good Place to Start is With the Oldest Companies in the Oldest Industries Yes. So, this is something

How Do I Find a Company with a Moat?

Hi, Geoff. I have just recently read your old article titled “How To Find Competitive Advantages In The Real World”. My question is, is that article still relevant at this point in time (because it is quite old)? If any, what would you update or change in that article? And about your comments on books about competition, do you believe that it is still true till today (Or you would like add to other book recommendation on competition besides “Hidden Champions”) ? Is it possible

In a Market Like This – Is It Better to Buy 10 Stocks Instead of Just My 5 Favorite Stocks?

Someone sent Geoff this email: Hi Geoff,   On regular days your focusing on overlooked stocks makes much sense to me and is the right place to look for good companies at a decent price.   But in this market selloff, wouldn’t it be better to buy blue chip stocks such as Nike, Disney, BrKb, etc.. if they fall to the right price (and I’m not sure they are there yet…).   Also, wouldn’t it be better to diversify? To own 10-12 stocks instead of

What is a Fair Price to Pay For Omnicom (OMC)?

Someone Geoff  this email ( to ask your own question: just send me an email ) : My question is a simple one. “What do you think is a fair price to pay for Omnicom?” Answer: Omnicom (OMC) Could be Worth Anywhere Between 1 to 1.5 Times Sales – so, About $70 to $100 a Share – But: You Probably Want At Least a 35% Margin of Safety, So Try Not To Pay More than $45 a Share for Omnicom This is a simple question. But, it’s tougher

Should I Really Just Automatically Ignore High P/E Growth Stocks Even if they Are Amazing Businesses?

Someone sent Geoff this email ( to ask your own question: just send me an email ) : Hey Geoff, The last 10 years saw the dominance of ‘growth’ (as quantitatively defined) over ‘value’. If you were a value (however it is defined) investor, you probably underperformed the relevant indices. (1) Is there a lesson to be learned here? When I see stocks trading at really high multiples, my immediate instinct is to ignore them – either too hard to value or too expensive. But by automatically

What Kind of Competition Will Car Dealers Face for the Sale of Used Cars and for Their Parts and Service Business?

Someone sent Geoff this email (to ask your own question: just send me an email): I think that car dealers face a lot of competition, especially for used cars and service, that I could never thoroughly understand the competitive advantages. But car dealers tend to have very stable margin. So I do think that they have certain competitive advantage thanks to location, long-time presence, as well as customer relationship built up through its new car business. So, I’d like to ask you about your thoughts on the

Middleby (MIDD): A Serial Acquirer in the (Normally) Super Steady Business of Supplying Big Restaurant Chains with Kitchen Equipment

Middleby (MIDD) is a stock I was excited to write-up, because it’s rarely been cheap. I’ve seen 10-year financial type data on the company. I’ve seen it show up on screens. And now the government response to coronavirus – shutting down so many of the restaurants that Middleby supplies – looked like a once in a lifetime opportunity to buy the stock. The company also has quite a bit of debt. That can make a stock get cheap quickly in a time like this. So,

Why Do You Sometimes Price a Stock Off of Its Free Cash Flow Yield Plus Growth Rate Instead of Just Using its P/E Ratio?

Someone sent Geoff this email:   Dear Geoff, In this video   you mention a PE of 26 for OTC and yet use an implicit growth rate of 6% which is not the inverse of 26. I would like to understand why that is. Answer: If a Company Converts 100% or More of Its Earnings Into Free Cash Flow While Also Growing – a Normal P/E Ratio Would Deeply Undervalue the Stock I’d assume it’s because 10% = (1/26) + 6% In other words… 10% – 6% = 4%

Why Shouldn’t I Count EPS Growth from Buybacks When Valuing a Stock?

Someone sent me this email: …you mentioned Omnicom, and you said that per share numbers should be avoided when computing growth…as you mentioned Omnicom buys back its stock, therefore why remove this information I have about this company from the implicit hurdle rate? Suppose we have 3 companies: a historically savvy buy backer, an automatic buy backer and a company who doesn’t buyback, shouldn’t we be able to discriminate between them if they were to all have the same FCF yield? Answer: It’s Best to

Question: Why Are You 40% in Cash?

Someone sent Geoff this email: I’m curious why the SMAs are 40% cash. Did that happen once you learned about the potential impact of the virus? Or was that the case beforehand? I know you were fully invested at some point last year, and I would have assumed your strategy was to stay fully invested. So you either sold things last year and never reinvested, or you went cash this year. I’m interested in anything you’d share. Part of the reason I ask is I

Bunzl (BNZL): A Distributor with 20 Straight Years of EPS Growth and 27 Straight Years of Dividend Growth – Facing a Virus That’ll Break At Least One of Those Streaks

Bunzl (BNZL) is a business I’ve known about for a long time. However, it’s not a stock I’ve thought I’d get the chance to write about. The stock is not overlooked. And it rarely gets cheap. EV/EBITDA is usually in the double-digits. It had a few years – the first few years of the recovery coming out of the financial crisis – where the EV/EBITDA ratio might’ve been around 8 sometimes. It’s back at levels like that now. Unfortunately, the risks to Bunzl are a…...

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How Can Long-Term Value Investors Make the Most of This Week’s Short-Term Volatility?

Andrew and I just did a podcast about volatility. And, of course, when we say “volatility” I want to remind everyone that’s a codeword for “downside volatility”. Nobody minds upside volatility. There are basically two topics worth discussing when it comes to volatility and how you as an investor should behave. One is how to “handle” volatility – psychologically and such. The other is how to take advantage of volatility. If we go back and think about Ben Graham’s Mr. Market metaphor – it’s really

The “Element of Compound Interest”: When Retaining Earnings is the Key to Compounding and When it Isn’t

In my first two articles about Warren Buffett’s letter to Berkshire Hathaway shareholders, I talked about Berkshire’s year-by-year results as a stock and about Warren Buffett’s approach to holding both stocks and businesses. Today, I want to talk about a very interesting section of Buffett’s letter that doesn’t (directly) seem to have all that much to do with either Berkshire or Buffett. This section starts with the name of a man Buffett has mentioned before “Edgar Lawrence Smith”. It also mentions a book review Buffett

How Buffett Holds: The Incredible Importance of the “Contrasting Trajectories” of Long-Term Winners and Losers

In my first article about Warren Buffett’s annual letter to Berkshire Hathaway shareholders, I talked about how difficult it would’ve been to hold Berkshire stock during all the years when it rose so much so fast. That’s one underappreciated part of how successful Berkshire has been as an investment. Buy and hold often sounds like a simple strategy to follow. Berkshire has returned 20% a year compounded over more than 50 years. It would’ve been easy to hold the stock if it rose 20% a

Ask Yourself: In What Year Would You Have Hopped Off the Warren Buffett Compounding Train?

Warren Buffett’s annual letter to Berkshire Hathaway shareholders was released today. It starts – as always – with the table comparing the annual percentage change in Berkshire Hathaway with the annual percentage change in the S&P 500 with dividends included. Long time readers of the Buffett letter will remember when the change in book value of Berkshire Hathaway was included. That’s been removed. We are left with the change in per-share market value of Berkshire Hathaway. Today, I’m just going to focus on this table.

Gainsco (GANS): A Dark Nonstandard Auto Insurer That’s Cheap Based on Recent Underwriting Results

Gainsco (GANS) is a dark stock. It does not file with the SEC. However, it does provide both statutory (Gainsco is an insurer) and GAAP financial reports on its website. These reports go back to 2012 (so, covering the period from 2011 on). Not long before 2011, Gainsco had been an SEC reporting company. Full 10-Ks are available on the SEC’s EDGAR site. Anything I’ll be talking about with you here today about Gainsco’s historical financial performance has been cobbled together through a combination of…...

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Keywords Studios: A good business with a leading niche in a terrific industry – but perhaps too expensive to buy (for now)

Written by: Vetle Forsland   Introduction The video game industry is a large and rapidly growing market with revenues projected to reach nearly $200 billion this year, a consistent growth rate in the high single-digits, and over 2.3 billion gamers across the globe. As video games have developed in graphics, gameplay and story, while moving most of the gaming experience online, it has silently become the largest entertainment industry on the planet. According to IDG Consulting, by 2020, the video games industry will bring in

Transcat (TRNS): A Business Shifting from Distribution to Services and a Stock Shifting from Unknown and Unloved to Known and Loved

Transcat is an interesting stock for me to write-up, because I probably have a bias here. Quan and I considered this stock – and researched it quite a bit – several years back. We were going to write it up for a monthly newsletter I did called Singular Diligence. All the old issues of this newsletter are in the stocks “A-Z” section of Focused Compounding. And – you’ll notice, if you go to that stocks A-Z section of Focused Compounding – that there’s no write…...

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Hilton Food (HFG): A Super Predictable Meat Packer with Long-Term “Cost Plus” Contracts and Extreme Customer Concentration at an Expensive – But Actually Not Quite Too Expensive – Price

Hilton Food Group (HFG) trades on the London Stock Exchange. It qualifies as an “overlooked stock” because it has low share turnover (17% per year) and a low beta (0.28) despite having a pretty high market cap (greater than $1 billion in USD terms). On a purely statistical basis, Hilton Food is one of the most predictable – in fact, in one respect, literally THE most predictable – companies I’m aware of. There’s a reason for this I’ll get into in a second. But, first…...

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Geoff’s Thoughts on Cheesecake Factory (CAKE)

Someone asked me my thoughts on Cheesecake Factory. It’s a stock we’ve looked at before. But, I have written about it recently. The stock hasn’t done well lately. It looks fairly cheap. Here was my answer: “I haven’t followed it lately. I know the stock hasn’t done that well. I did a very quick check of the stock price just now looking at the long-term average operating margin, today’s sales, today’s tax rates, etc. It seems that on an earnings basis (normalized for a normal…...

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Finding Enough Investment Ideas

SEPTEMBER 30, 2013 by Geoff Gannon Upon seeing that The Avid Hog is a monthly newsletter, someone asked this question: …how do you expect to find suitable candidates every month? Is the supply of good companies that large? The supply of good companies is enormous. If you don’t have any restrictions on market cap or country, there are always good companies out there. Supply is never the problem. Knowing that supply well enough is. Although I consider myself a value investor, I don’t get ideas the way most

Stock Price Guidelines

APRIL 1, 2014 by Geoff Gannon It’s amazing how so many of the deals cluster around the 10x pretax earnings ratio despite these businesses being in different industries with different capital expenditure needs and things like that. Even the BNI acquisition, which many thought was overpriced (crazy / insane deal! Buffett has lost his marbles!) looks normal by this measure; a price that Buffett has always been paying. And yes, right now I’m the guy swinging around a hammer (seeing only nails), but I notice a

Canterbury Park (CPHC): A Stock Selling for Less than the Sum of Two Parts – A Card Casino and 127-Acres of Land (Plus You Get a Horse Track for Free)

Canterbury Park (CPHC) is a sum of the parts stock. After our experiences – and when I say “our”, I mean my decisions to buy – Maui Land & Pineapple, Keweenaw Land Association, and Nekkar – Andrew has a sticky note on his desk that says: “When thinking about SOTP, think STOP”. Canterbury Park (CPHC) is a sum of the parts (SOTP) stock. Since we’re thinking “SOTP” should we also be thinking “STOP”? Yes, Canterbury Park is a sum of the parts stock. But… That…...

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Stella-Jones: Long-Term Contracts Selling Utility Poles and Railroad Ties Add Up to A Predictable, Consistent Compounder that Unfortunately Has to Use Debt to Beat the Market

Stella-Jones mainly provides large customers with pressure treated wood under contractually decided terms. The customers are mainly: U.S. and Canadian railroads, U.S. and Canadian electric companies, U.S. and Canadian phone companies, and U.S. and Canadian big box retailers. Stella-Jones has some other sources of revenue – like selling untreated lumber and logs – that provide revenue but no value for shareholders. The company also has some more niche customers – probably buyers for using wood in things like bridges, piers, etc. – that probably do…...

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One Ratio to Rule Them All: EV/EBITDA

By Geoff Gannon 06/07/2012   For understanding a business rather than a corporate structure – EV/EBITDA is probably my favorite price ratio.   Why EV/EBITDA Is the Worst Price Ratio Except For All the Others Obviously, you need to consider all other factors like how much of EBITDA actually becomes free cash flow, etc. But I do not think reported net income is that useful. And free cash flow is complicated. At a mature business it will tell you everything you need to know. At

Points International (PCOM): A 10%+ Growth Business That’s 100% Funded by the Float from Simultaneously Buying and Selling Airline Miles

Points International (PCOM) is a stock Andrew brought to me a couple weeks ago. It always looked like a potentially interesting stock – I’ll discuss why when I get to management’s guidance for what it hopes to achieve by 2022 – but, I wasn’t sure it’s a business model I could understand. After some more research into the business, I feel like I can at least guess at what this company is really doing and at how this helps airlines. My interpretation of what the…...

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Security Analysis: Introduction (Part 1)

By: Geoff Gannon July 25, 2008 The introduction to Security Analysis is a treasure trove of Grahamian thought. It is impossible to fully plumb the depths of this Grahamian gold mine in a single post. Therefore, I have separated my comments into two posts. This post explores the opening paragraph of the introduction with special attention to Graham’s style. We should begin with the most general point made in Graham’s introduction: It is impossible to completely separate analysis and action, theory and practice. Therefore, while the title

Sydney Airport: A Safe, Growing and Inflation Protected Asset That’s Leveraged to the Hilt

Today’s initial interest post really stretches the definition of “overlooked stock”. I’m going to be talking about Sydney Airport. This is one of the 20 to 25 biggest public companies in Australia. It has a market cap – in U.S. dollar terms (the stock trades in Australian Dollars) – of about $13 billion. It also has a lot of debt – including publicly traded bonds. So, not what you’d normally consider “overlooked”. On the other hand, Andrew and I have a couple standard criteria we

F.W. Thorpe: A Good Business Making Durable Products that May Have Already Peaked

Today’s initial interest post is a company I like a lot. It’s trading at a price that could be justifiable – possibly – based on that company’s past performance. But, it’s not a stock I’m going to give a very high initial interest level too. The reason for that is uncertainty about the future. I’ll get to that uncertainty in a second. First, I want to describe what FW Thorpe does. The company makes lights. I won’t go into too much detail here. You can…...

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Gamehost: Operator of 3 “Local Monopoly” Type Casinos in Alberta, Canada – Spending the Minimum on Cap-Ex and Paying the Maximum in Dividends

Today’s initial interest write-up is a lot like yesterday’s. Yesterday, I wrote about an Alberta based company paying out roughly 100% of its free cash flow as dividends. In fact, that company was paying almost nothing in cap-ex. Today’s company is doing the same. It pays almost everything out in dividends. And it doesn’t spend much on cap-ex. So, cash flow from operations translates pretty cleanly into dividends. And like yesterday’s stock being written up (Vitreous Glass) – today’s stock being written-up (Gamehost) probably attracts…...

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Vitreous Glass: A Low-Growth, High Dividend Yield Stock with Incredible Returns on Equity and Incredibly Frightening Supplier and Customer Concentration Risks

Vitreous Glass is a stock with some similarities to businesses I’ve liked in the past – NACCO, cement producers, lime producers, Ball (BLL), etc. It has a single plant located close enough to a couple customers (fiberglass producers) and with an exclusive source of supply (glass beverage bottles from the Canadian province of Alberta that need to be recycled) and – most importantly – the commodity (glass) can’t be shipped very far because the value to weight ratio is so low that the price of…...

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A-Mark Precious Metals (AMRK): A Dealer and Lender in Physical Gold

A-Mark Precious Metals (AMRK) has been written up twice at Value Investor’s Club. The most recent time was this year. You can read those write-ups over there. It was this most recent write-up at Value Investor’s Club that got me interested in the stock. However, it was for different reasons than that write-up itself lays out as the case for buying the stock. The VIC write-up focuses on how low volatility in the price of gold (and silver and other precious metals) in recent years…...

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Daily Journal (DJCO): A Stock Portfolio, Some Real Estate, Some Dying Newspapers, and a Growing Tech Company with Minimal Disclosures

This was going to be one of my initial interest posts. Then, I started reading Daily Journal’s SEC filings for myself. At that point, I realized there just isn’t enough information being put out by Daily Journal to possibly value the company. There just isn’t enough information to even gauge my initial interest in the stock. I’ll still try at the end of this post. But, my look at Daily Journal will be a quicker glance than most. Daily Journal is a Los Angeles based

Psychemedics (PMD): A High Quality, Low Growth Business with a Dividend Yield Over 7% – And A Third of the Business About to Disappear

Psychemedics (PMD) is a micro-cap stock (market cap around $50 million right now) that trades on the NASDAQ. It is not – by my usual definitions – a particularly overlooked stock. The beta is about 0.53 (low, but many stocks I’ve written about have much lower betas). The share turnover rate – taking recent volume in the stock and multiplying it to see how much of a company’s total shares outstanding would turn over in a given year at this recent rate of trading –…...

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Vertu Motors (VTU): A U.K. Car Dealer, “Davis Double Play”, and Geoff’s Latest Purchase

Accounts I manage own some shares of Vertu Motors (VTU) – bought last week – but, far less than a normal position. Whether we end up owning a full position – that is, having something like 20% of the portfolio in Vertu – or not depends mostly on whether the stock’s price comes down and stays down for a while. As I write this, shares of Vertu trade for about 40 pence. They were as low as 31 pence not too long ago. I wrote…...

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Nekkar: Why We Bought It – And is It Cheap?

Someone emailed me a question about Nekkar: “I was just curious to understand your thesis on Nekkar. Although they quite correctly have a net cash position of MNOK 0,3bn, they also have close to 0,2 in negative WC (95 in receivables/inventory minus current liabilities of MNOK 274), and I believe most of the cash in Syncrolift (0,2) comes from pre-payments, which over the course of the project will be used for buying raw materials, paying sub-suppliers etc. I am not sure of the percentage but…...

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LEAPS

Originally posted at www.Gannononinvesting.com on June 01, 2011 by Geoff Gannon Someone who reads the blog sent me this email: Dear Geoff, in your article “Should you Buy Microsoft?” on GuruFocus, you said, that it makes sense for some investors to use LEAPS instead of the stock. After thinking long about that, I came to the conclusion, that LEAPS can be viewed as a form of leveraged investment with an insurance against a falling stock price included…So LEAPS would make sense, if you want to leverage

How to Come Up With Investing Ideas

December 23, 2010 A reader sent me this email: Hi Geoff, …I was wondering if there was any other advice you had on how to pick what companies I should look into. You mention a few blogs that I should look to for ideas but what about stock screens? Should I employ those in order to get a rough list of stocks and then choose a few and analyze them by reading their 10-K, etc.? I am just worried I am not sure how to get

Calculating Free Cash Flow: 5 Illustrated Examples From Actual 10-Ks

Some readers have emailed me with questions about exactly how to calculate free cash flow, including: Do you include changes in working capital? Do you really have to use SEC reports instead of finance websites? Yes. You really do have to use EDGAR. Finance sites can’t parse a free cash flow statement the way a trained human like you can. As you know, I’m not a big believer in abstract theories. I think you learn by doing. By working on problems. By looking at examples. Here are 5

EBITDA and Gross Profits: Learn to Move Up the Income Statement

“In lieu of (earnings per share), Malone emphasized cash flow…and in the process, invented a new vocabulary…EBITDA in particular was a radically new concept, going further up the income statement than anyone had gone before to arrive at a pure definition of the cash generating ability of a business…” William Thorndike, “The Outsiders”   “I think that, every time you (see) the word EBITDA you should substitute the word bullshit earnings.” Charlie Munger   The acronym “EBITDA” stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. A company’s EPS (which is just

Why Are U.S. Banks More Profitable Than Banks in Other Countries?

By GEOFF GANNON 09/05/2019 A Focused Compounding member asked me this question: “Have you any thoughts on why U.S. banks are so profitable (the better ones at least)? I’ve looked at banks in other countries (the U.K. and some of continental Europe) and banks there really struggle to earn the spreads and returns on equity of high quality U.S. banks. This is particularly strange as the U.S. banking market is actually pretty fragmented, certainly more so than the U.K. which is dominated by a few

How I Analyze Bank Stocks

By GEOFF GANNON   09/04/2019   We did a Focused Compounding Podcast episode that was 100% dedicated to bank investing:   https://focusedcompounding.podbean.com/e/ep-96-all-about-investing-in-banks/   In that podcast notice that I analyze banks completely differently than most value investors. I don’t believe price-to-book is an especially important metric. I value banks based on the amount of their share price, their deposits per share (so P/Deposits so to speak), their growth in deposits, and finally the profitability of those deposits (how low cost are they, how “sticky” are

Why You Might Want to Stop Measuring Your Portfolio’s Performance Against the S&P; 500

By Geoff Gannon December 8, 2017     Someone emailed me this question about tracking portfolio performance: “All investors are comparing their portfolio performance with the S&P 500 or DAX (depends were they live). I have asked a value investor why he compared the S&P 500 performance with his portfolio performance…for me as a value investor it makes no sense. A value investor holds individual assets with each of them having a different risk…it’s like comparing apples and oranges. The value investor told me that…Warren

Monarch Cement (MCEM): A Cement Company With 97 Straight Years of Dividends Trading at 1.2 Times Book Value

by GEOFF GANNON This is my initial interest post for Monarch Cement (MCEM). I’m going to do things a little differently this time. My former Singular Diligence co-writer, Quan, emailed me asking my thoughts on Monarch as a stock for his personal portfolio. I emailed him an answer back. I think that answer will probably help you decide whether you’d want to buy this stock for your own portfolio better than a more formal write-up. So, I’ll start by just giving you the email I

The Moat Around Every Ad Agency is Client Retention

April 24, 2016 By Geoff Gannon Moat is sometimes considered synonymous with “barrier to entry”. Economists like to talk about barriers to entry. Warren Buffett likes to talk about moat. When it comes to investing, “moat” is what matters. Barriers to entry may not matter. Thinking in terms of barriers to entry can frame the question the wrong way. If you’re thinking about buying shares of Omnicom and holding those shares of stock forever – what matters? Do barriers to entry matter? Does it matter

Insider Buying vs. Insider Incentives

December 17, 2017 by Geoff Gannon A blog reader sent me this email: “Do you ever pay attention to insider transactions when analyzing a company?” I do read through lists of insider buys from time-to-time. I follow a blog that covers these kind of transactions. But, I can’t think of any situation where I incorporated insider buying or selling into my analysis.     Learn How Executives are Compensated I can, however, think of situations where a change in how insiders were compensated was included in my analysis.

How to Quantify Quality

By Geoff Gannon on November 2, 2013   Someone who reads the blog sent me this email: I kind of understand the quantitative part of stock analysis (such as number crunching, valuation) but really struggle to understand the qualitative aspects which determine quality. What kinds of questions to ask yourself in order to gain more insights into the qualitative? A qualitative analysis does not have to be any less evidence based than a quantitative analysis. However, you do have to gather the evidence yourself. What counts as

Why I Don’t Use WACC

December 14, 2017 by Geoff Gannon A blog reader emailed me this question about why I appraise stocks using a pure enterprise value approach – as if debt and equity had the same “cost of capital” – instead of using a Weighted Average Cost of Capital (WACC) approach:   “…debt and equity have different costs. In businesses with a (large) amount of the capital provided by debt at low rates, this would distort the business value. In essence I am asking why do you not determine

How Safe Can You Really Make a 5-Stock Portfolio?

By GEOFF GANNON Investors often overestimate the reduction in volatility they will get from diversification and underestimate the reduction in volatility they will get from simply owning stocks with a beta less than 1.   Over the last 10-11 years, I’ve owned 5 or fewer stocks in about 90%+ of all quarters. My portfolio’s returns have had a lower standard deviation in terms of returns than the S&P 500. And in terms of just “downside volatility” – which is what most investors mean when they…...

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When Should You Diversify?

MAY 19, 2015 by Geoff Gannon   Someone who reads the blog sent me this email:   “I have been thinking about portfolio construction lately.  …due to the strict standards you have, I thought it was very natural to just hold mainly four stocks…unfortunately, this method has shown its short comings lately. Both because of (your) mistake in picking CLUB/WTW instead of the other winners discussed in Avid Hog/Singular Diligence, and also because I am currently getting in touch with a lot more very cheap opportunities

All About Edge

December 23, 2017 by Geoff Gannon Richard Beddard recently wrote a blog post about company strategy. And Nate Tobik recently wrote one about how you – as a stock picker – have no edge. I’d like you to read both those posts first. Then, come back here. Because I have something to say that combines these two ideas. It’ll be 3,000 words before our two storylines intersect, but I promise it’ll be worth it.   Stock Picking is Like Playing the Ponies – Only Better Horse races use

How to Judge a Business’s Durability

Originally written by Geoff Gannon on June 13, 2015   My last post listed examples of threats to a company’s durability. This post will be about how we assess those threats. You can always imagine a threat. Is it a realistic threat? How do you judge that? There are some industries where durability is pretty much perfect. The business doesn’t change much. Barriers to entry are high. The future development of substitutes is unlikely. Location advantages are big. A good example is lime. Lime is

Should We Care Why the Stocks We Buy are Cheap?

SEPTEMBER 2, 2015 by Geoff Gannon One of my favorite blogs, Value and Opportunity, recently did a post about how the best value stocks are often those that are not cheap by the most obvious numbers (P/E, P/B, etc.). The post is entitled “Value Investing Strategy: Cheap for a Reason”. The basic argument of the post is that: “…Especially in a market environment like now, cheap stocks are cheap for a reason.It is very unlikely that ‘you’ are the first and only one who knows how to run

Truxton (TRUX): A One-Branch Nashville Private Bank and Wealth Manager Growing 10% a Year and Trading at a P/E of 14

by GEOFF GANNON Truxton (TRUX) is an illiquid, micro-cap bank stock. TRUX is not listed on any stock exchange. It trades “over-the-counter”. And it does not file with the SEC. The bank has two locations (one in Nashville, Tennessee and one in Athens, Georgia). However, only one location (the Nashville HQ) is actually a bank branch. So, I’m going to be calling Truxton a “one branch” bank despite it having two wealth management locations. The company doesn’t file with the SEC. But, it is not…...

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Bonal (BONL): An Extremely Tiny, Extremely Illiquid Stock that Earns a Lot But Doesn’t Grow at All

Bonal isn’t worth my time. It might be worth your time. It depends on the size of your brokerage account and the extent of your patience. So, why isn’t Bonal worth my time? I manage accounts that invest in “overlooked” stocks. Bonal is certainly an overlooked stock. It has a market cap under $3 million and a float under $1 million (insiders own the rest of the company). It often trades no shares in a given day. When it does trade, the amounts bought and…...

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Revisiting Keweenaw Land Association (KEWL): The Annual Report and the Once Every 3-Year Appraisal of its Timberland Are Out

Accounts I manage hold shares of Keweenaw Land Association (KEWL). I’ve written about it twice before: Keweenaw Land Association: Buy Timberland at Appraisal Value – Get a Proxy Battle for Free And Why I’ve Passed on Keweenaw Land Association – So Far I didn’t continue to pass on Keweenaw Land Association. Like I said, the stock is now in accounts I manage. There are really two things worth updating you on. One is the annual report. The other is the appraisal. The appraisal is something…...

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IEH Corporation (IEHC): May Be a Good, Cheap Stock – But, Definitely in the “Too Hard” Pile for Now

As this is an initial interest post, it’ll follow my usual approach of talking you through what I saw in this stock that caught my eye and earned it a spot near the top of my research watch list – and then what problems I saw that earned it a low initial interest score. I’ll spoil it for you here. IEH Corporation (IEHC) is a stock I’m unlikely to follow up on because of the difficulty of digging up the kind of info that would

BWX Technologies (BWXT): A Leveraged, Speculative, and Expensive Growth Stock that Might be Worth It

BWX Technologies (BWXT) has been at the top of my research pipeline for a while now. I wrote about the company – when it was the combined company that is now split into BWXT and Babcock & Wilcox Enterprises (BW) – a few years back. You can read my report on the combined Babcock & Wilcox in the Singular Diligence archives. Today, I’m not going to talk about the business – which is described in great detail in that report (see the “Stocks A-Z” tab)…....

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Resideo Technologies (REZI): A Somewhat Cheap, But Also Somewhat Unsafe Spin-off from Honeywell

This is a revisit of Resideo Technologies (REZI). My initial write-up of Resideo was done before the stock was spun off from Honeywell. Three things have changed since that initial interest post. One: Honeywell spun-off Resideo. So, we now have a price on Resideo. Two: I’ve created a five part scoring system – a checklist of sorts – for the stocks I write up here at Focused Compounding. This helps me more systematically order what stocks I should be writing up for the first time,…...

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Vertu Motors: A Cheap and Safe U.K. Car Dealer

Vertu Motors owns more than a hundred car dealerships in the United Kingdom. About half of the time – so, at 50+ locations – Vertu Motors also owns the land on which the dealership is built. They lease the other half of their locations. The stock trades on the London Stock Exchange (the AIM market, specifically) under the ticker “VTU”. Back on November 14th, 2017 Focused Compounding member Kevin Wilde sort of wrote up Vertu Motors. He did an idea exchange post on U.K. car…...

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Green Brick Partners (GRBK): A Cheap, Complicated Homebuilder Focused on Dallas and Atlanta

I chose to write-up Green Brick Partners (GRBK) this week for a couple reasons. The first is the company’s headquarters: Plano, Texas. I live in Plano. And the company gets about half of its value from its Dallas-Fort Worth homebuilding operations. My “initial interest post” checklist goes something like this: Do I understand the business? Is it safe? Is it good? Is it cheap? The single most important questions is number zero: “Do I understand the business?” Since I’ve lived for about seven years right…...

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Follow-Up Interest Post: Resideo Technologies (REZI) – Stock Falls, My Interest Rises

The Resideo spin-off has taken place. And the stock has traded on its own for a bit now. So, I thought I would very quickly re-visit the stock here. You can check the ticker REZI (Resideo Technologies). It’s $19.56 a share as I write this. Here is a link to the press release announcing the completion of the spin-off: https://www.otcmarkets.com/stock/REZI/news/story?e&id=1207602 “Honeywell distributed one share of Resideo common stock for every six shares of Honeywell common stock held as of 5:00 p.m. Eastern Time on October…...

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How Big Can Amazon Get?

(Note to Focused Compounding Members: Geoff here. This is one of my general investing posts – not a specific stock write-up. The first half of this post was made available free for everyone at “Gannon On Investing”. The second half of this article is exclusive for members like you. My actual stock write-ups are always exclusive to Focused Compounding. The first half of my general investing articles are available free at “Gannon On Investing”; you get the whole article here because you’re a member.) Someone…...

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Resideo: Honeywell’s Boring, No-Growth Spin-off Might Manage to Actually Grow EPS for 3-5 Years

Yesterday, Honeywell set the distribution date for the spin-off of its home comfort and security business “Resideo”. So, I thought now would be a good time to do an “initial interest post” on Resideo. In this article, I’ll give my first impressions of the stock and then I’ll conclude by giving you an idea of how interested I am in following up with this stock idea. As always, I’ll grade the idea on a scale ranging from of 0% interest to 100% interest. To give…...

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Geoff’s SEC Filing Notes for: Resideo (a Planned Honeywell Spin-off)

Notes on Honeywell’s planned spin-off of Resideo Technologies I’m trying something new here. A lot of you want to see more “initial interest” write-ups from me. But, those write-ups are actually step two of my investment process. I first read a 10-K (or, in this case, a spin-off document) on EGDAR and mark-up that SEC filing. I make my notes directly on the 10-K through a combination of highlights and questions, comments, etc. in the margin and at the bottom of the page. I never…...

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Outperformance Anxiety

To Focused Compounding members: I spend a surprising amount of time talking with members about other investors – investors who are doing better than them. The truth is: returns much beyond 20% a year aren’t even worth thinking about. Sure, you can find investors who have done better than 30% a year for a ten year stretch. I have a copy of Joel Greenblatt’s “You Can Be a Stock Market Genius” sitting here on my desk. And if I flip to the back of that…...

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Pre-Judging a Stock

Monday, August 6th – Butler National by VETLE FORSLAND Tuesday, August 7th – Northfield Precision Instruments by LUKE ELLIOTT To Focused Compounding members: This week, a Focused Compounding member sent me a link to a blog post about Brighthouse Financial (BHF). Brighthouse Financial is the spun-off retail business of MetLife. Although websites often list Brighthouse Financial under the industry group “Life Insurers”, the stock is really a seller of annuities. Many of these annuities are tied to the performance of the S&P 500 or other…...

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Doubt as a Discount

Saturday, June 9th – Hamilton Beach Brands by ANDREW KUHN To Focused Compounding members: Let’s play a game. I ask you a series of questions. You give me a series of answers. I then test the answers you give to prove them false using as unfavorable a definition of false as I feel like. You have $1,000 in your pocket. You can’t leave the room. You can’t use your phone. And you can’t take off your shoes. I offer you even money odds on each…...

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Stylistic Skew

Wednesday, June 27th – Maui Land & Pineapple by GEOFF GANNON To Focused Compounding members: This week, Vetle Forsland was our guest for two podcast episodes. One was about GameStop (GME). The other was about Entercom (ETM). You should listen to them both. What stood out to me in those two episodes was Vetle’s style as a stock picker. GameStop sells – among other things – physical copies of video games. Entercom owns terrestrial radio stations. A lot of investors think these two stocks are…...

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Relative Regret

To Focused Compounding members: One of the most difficult things for investors to deal with is to watch other get richer faster than you. In the stock market, the same choices are available to everyone. So, if someone is up 20% this year, they are up 20% purely on a collection of opportunities you passed on. Two things make this even tougher for the people reading this memo. One, you judge yourself on your relative results versus a benchmark like the S&P 500. Two, you…...

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There’s Always a Simpler Problem to Solve

Wednesday, June 13th – Monro by DAVE ROTTMAN   To Focused Compounding members: As a stock picker, when you’re first faced with the decision to buy or not buy a stock – it seems like a complicated question. Consider the mental math problem of 54 times 7. There are a couple ways of tackling this problem. The simplest though is to multiply 50 by 7, getting 350 and then multiply 4 by 7 getting 28. You add 350 to 28 and get 378. There are…...

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Pendrell (PCOA) Follow-Up: Reading into a CEO’s Past and the Dangers of “Dark” Stocks

A member commented to the write-up I did yesterday on Pendrell. I think the comment and my response are worth making into a full follow-up “memo”. So, here they are: “Geoff, This company definitely seems promising. I saw the blog post from Hidden Value that you retweeted and ended up buying a small starter position in the company after reading the 10k. That was before even seeing that you ended up writing a post on it. I’m struggling to decide how to size the position…...

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Weight Watchers (WTW): Mistakes Made Over 4 Years of (Emotional) Volatility

I lost a lot of money in Weight Watchers. Let’s look at why that was.   As I write this article, Weight Watchers (WTW) stock is at $44.30 a share.   I bought my shares at $37.68 a share in 2013 and sold them (in March of 2017) at $19.40. So, I realized a loss of 49%. I also tied up money for about 3.5 years. During this same time period, the S&P 500 returned about 12% a year. I probably could have found something…...

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Reflections on the Newsletter: Why Quan and Geoff Wrote Those 27 Stock Reports

Focused Compounding includes a “Library” with 27 stock reports. I co-wrote those stock reports with Quan Hoang between 2013 and 2016. Although Quan and I no longer work together, he agreed to put his thoughts on that experience in writing for our community members to read. I think reading Quan’s “Reflections” will help you put each of those 27 reports in better context.   Quan’s Reflections Geoff asked me to write a reflection on my experience writing The Avid Hog (a newsletter we later renamed…...

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EBITDA and Gross Profits: Learn to Move Up the Income Statement

“In lieu of (earnings per share), Malone emphasized cash flow…and in the process, invented a new vocabulary…EBITDA in particular was a radically new concept, going further up the income statement than anyone had gone before to arrive at a pure definition of the cash generating ability of a business…” William Thorndike, “The Outsiders”   “I think that, every time you (see) the word EBITDA you should substitute the word bullshit earnings.” Charlie Munger   The acronym “EBITDA” stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.