Amid market dislocation due to inflationary pressures, a banking crisis, interest rate hikes causing a prolonged recession, and other factors, more than ever, investors are concerned about where to put money to work in the most efficient way. However, we think the best approach for long-term investors amid uncertainties is “worry about the macro, focus on the micro”. As there is a small sub-segment of the market that regardless of what happens with the macro picture, the business will continue to do well (or are only mildly affected), due to such a strong secular tailwind in the business models. Some of the prominent transitions include brick-and-mortar retail to e-commerce, software licensing to software subscriptions (SaaS), programmatic TV to streaming and cash to electronic as a payment method, etc. As long-term investors, these are the opportune times to establish or add to positions that not only persist through the downturn but also come out much stronger when the economy recovers. Therefore, we think the current drawdown could offer opportunities for attractive entry points into these names. 

Below we have screened for companies with the following criteria:

• Revenue Per Share compounded annual growth rate (CAGR) in the last five years of at least 15%
• Market cap larger than $100 million
• Earnings before interest taxes depreciation and amortization (EBITDA) margin of at least 20%
• Forward P/E ratio smaller or equal to 35

The criteria above measure a company’s revenue growth on a per-share basis of at least 15%. This is a really high-bar, as in order to maintain the premium growth rate for a long time without issuing too many shares indicates certain secular tailwinds in the business or something really unique that competitors can’t replicate. This track record is also a robust signal that management is executing well. Also, we use the per-share metric as we think that it is important to minimize the dilution for shareholders. Having said that, we think share issuance can be accretive if done appropriately when shareholders receive more (or equal) than what they give up in intrinsic value.

Here is the screener:

As usual, we prefer companies that are over $100 million in market cap, as these companies have proven themselves to be mature entities with a solid track record to assess. In addition, we add a criterion of an EBITDA margin of at least 20%, which is not too tough, as we don’t want to exclude businesses that are prioritizing growth and market share at the expense of current profitability. Lastly, we use a Forward P/E ratio of less than 35, as we think although great businesses are rare and valuable, a great company can always turn into a bad investment if investors are not disciplined about what they are paying for.

A quick reminder is we have excluded the Energy sector from the screener as most names in the Energy space have experienced an abnormal tailwind due to inflation. Therefore, these names may appear cheap due to being at their peak in the business cycle.

Members will recognize some of the names that we cover in our Model Portfolios and coverage list such as Constellation Software Inc. (CSU), EQB Inc. (EQB), and TMX Group Ltd (X).

Again, these companies on the list are not recommendations, but rather a starting point that helps investors generate potential investment ideas and strategies. Investors can view our previous screener blog here.

Take Care,

Disclosure: The analyst(s) responsible for this report do not have a financial or other interest in the securities mentioned.