A Cyclical Cannibal (Premium Post)

When Low Growth Enables Higher Returns

At EPC we like to follow, study, and own high-quality, predictable, and durable businesses that have the ability to grow and still return ample cash to shareholders. We especially like it when a company emphasizes consistent and significant share repurchases at reasonable prices as we’ve seen the power of this combination. We call these businesses cannibals.

We really don’t use screens in our investment process, but I thought it would be interesting to throw together a quick proxy for the above criteria. I ran a simple filter on TIKR (a great resource for those that don’t subscribe) with the following criteria:

• Revenue growth of 3% or more for the past 10 years;

• Return on equity of 15% or higher;

• Diluted shares outstanding decreasing by 5% or more per year since 2015;

• Valuation of 20x earnings or less;

• Market cap of $500M or higher.

Basically this is just a quick and dirty snapshot of potentially decent businesses that aren’t overly expensive, who have hammered their share count for a long period of time and are large enough for us to own. Not an overly demanding set of criteria, but the results still surprised me.

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There are ~67,500 stocks in the TIKR global universe and just 21 – or 0.03% - met these five criteria. The types of businesses vary but the common thread was world class share repurchase programs. Here is the full list sorted alphabetically: