The Evergreen Investing blog aims to prove that a portfolio of stocks can generate decent annual returns through dividends and capital gains over a 5 year period. Just like an evergreen tree that maintains green leaves through the seasons, I’m hoping to build a portfolio that will maintain a steady stream of gains through the year from dividends or capital gains.
My strategy involves picking two categories of stocks: “Compounders” and “Deep value”.
“Compounders” are stocks which can increase their earnings over the long term. Holding such stocks over the long term is highly profitable.
- A proven track record of growth. Winners win. I’ll be looking for companies operating in industries experiencing secular growth. Ideally, these are companies which have compounded revenue at least 10% per year over the last 5 years.
- Moats. Internet platforms benefiting from network effects and high switching costs will be ideal. The strongest compounders benefit from multiple moats such as network effects, switching costs and economies of scale.
- Smaller companies. Smaller companies (eg. market cap below USD10 billion) have a better chance of being 10 baggers because such companies are still considered too illiquid by most funds and ETFs.
- Founder-leaders with integrity. Founder-CEOs with skin in the game who own at least 10% of the company are likely to be more motivated to grow the company than professional managers. The product development speed of Datadog, a company led by two founder-leaders has been amazing with Datadog introducing up to 8 products in a single quarter. For US companies, I’ll look for companies with high CEO ratings on Glassdoor.
“Deep value” stocks are stocks trading at a low multiple of their profit, cash flow or book value. One key risk involves buying value traps where the company stays cheap forever or continues falling.
- Strong balance sheet, preferably with no debt. Companies with no debt are less likely to face financial difficulties when the going gets tough. I
- Limited revenue concentration. Some companies are cheap because they depend on a certain customer or employee to generate most of their sales. A company where their largest customer or employee does not make up more than 10% of revenue will be ideal.
- Sustainable dividends. Choosing cheap stocks which pay a sustainable dividend ensures that a return is possible from cheap stocks while waiting for a catalyst to unfold. The dividend should be sustained by current earnings and free cash flow. Ideally, the dividend should make up only 50-60% of free cash flow so management has enough cash to reinvest in the business.
Contact me at TheEvergreenInvestor@gmail.com