(NEW REPORT) Proprietary monopolistic data that matters
The reason behind the expected 18% CAGR
Over the years, five names have shown up in Best Anchor Stocks that had one thing in common: cyclicality taking hold of the narrative despite the business’ long-term secularity.
Jerome Dodson (founder of Parnassus Investments) said the following in an interview that ended up shaping my investment philosophy:
Many of our biggest winners have been companies that operate in cyclical industries with secular growth drivers. When their business cycle turns down, investors become overly pessimistic and extrapolate the current negative conditions. They forget the cycle will eventually turn, throw in the towel on the secular growth drivers, and engage in panic selling, pushing the stock to bargain-basement levels. But eventually the cycle turns, and the stock soars higher. It’s difficult to have the courage to buy when everyone else is selling, and this has been an important part of our success.
Having the above in mind has helped my find several interesting and profitable situations:
Keysight (60% CAGR since publish date)
Medpace (42% CAGR)
ASML (26% CAGR)
Deere (16% CAGR)
Texas Instruments (16% CAGR)
None of these were secrets, they were just hard to own for many professional investors because they were “not working at any given moment.”
In every case, the price you had to pay for that mispricing was patience, the fundamentals eventually inflected while the market waited for a catalyst that, in hindsight, wasn’t necessary.
I believe I’ve found the sixth company of this kind, albeit even better because it’s not even exposed to the industry’s cycles (all of the above, to a greater or lesser extent, were).
Below I’m sharing the full report on a company most investors have mistaken as cyclical due to the industry’s dynamics. Underneath, one can find something very different.
What I found underneath the label
A few things stood out to me as I went through the research, and I think they’re worth sharing before you get to read the full thesis.
A 90%+ share of the single workflow its customers can’t operate without. This company exhibits monopoly-like characteristics on the thing that matters most in its industry.
Regulators effectively confirmed the superiority by blocking an acquisition that, in hindsight, did not change the fate of the industry.
Management’s own incentive plan is based on aggressive stock price targets. Boards don’t set stretch targets like that unless they genuinely believe the shares are cheap and the objectives are achievable.
There’s roughly a 10x gap between current revenue and management’s own estimate of the total addressable market — and by management’s own admission, about 80% of the growth needed to close that gap can come from customers the company already has. That’s a very different growth profile than needing to win new logos in a crowded market.
Buybacks have already cut shares outstanding by more than 20% and management continues to simplify the business. Shrinking to become better is almost always a great capital allocation sign.
The number that matters most
My base case: ~18% annualized returns over the next 5 years.
What makes that number interesting is what it doesn’t require. It assumes no multiple expansion — the valuation multiple is already low relative to the quality of the underlying business, so I’m not underwriting a re-rating story. The return comes almost entirely from operating fundamentals: revenue growth, margin expansion, and disciplined capital return.
That’s the same DNA behind every name on the list above. None of those five needed the market to suddenly “wake up” and pay a higher multiple (although it helped at times!). The business kept compounding, and eventually the market had no choice but to follow.
What I look for in these situations:
A moat that gets stronger with scale, not weaker
Recurring, high-visibility revenue
Management with the correct incentives in play and deploying capital intelligently
A valuation that doesn’t require heroic assumptions to work
This one checks every box. I’ve spent the last two months pulling the thesis apart and you can find the result below.
I started a position in this company today.
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