The hallmark of a quality business is long-term growth in revenue and earnings. A quality company doesn’t need to be a hyper-growth star – what matters more is predictability of earnings over the long term, across economic cycles.
Our goal is a globally diversified and reasonably valued portfolio, where companies grow predictably over time. That’s why we don’t invest solely in the fastest-growing businesses. Doing so would push valuations too high and increase risks.
5 Year Forecast for Sifter Fund Companies
Sifter Fund’s holdings can be divided into three categories based on their expected five-year revenue and earnings growth. Each category contains roughly the same number of companies.
Fast Growers
→ Expected earnings growth*: above 10% per year
→ Examples: Semiconductor companies, Microsoft, Safran
Moderate Growers
→ Expected earnings growth*: 7–9% per year
→ Examples: Most pharmaceutical companies, Alphabet
Steady Growers
→ Expected earnings growth*: 3–6% per year
→ Examples: Most industrials, Johnson & Johnson
*Sifter forecast 2025–2029
In this article, I’ll outline five key characteristics that enable a quality company to grow over the long term.
1. Growing End Market – The Foundation of Sustainable Growth
The starting point for sustainable growth is an industry or niche market where demand is expanding. If the end-market demand is stagnant, a company is forced to steal market share from competitors – often leading to price competition and eroded margins.
Research shows that over 60% of a company’s growth comes from end-market growth.
The best performers typically find growth pockets where demand grows steadily year after year. These niches are often critical parts of the industry value chain, supported by long-term structural trends.
Examples of end-market growth:
Obesity treatment
The global obesity epidemic has created enormous, long-lasting demand for effective treatments. Novo Nordisk and Eli Lilly benefit from this trend with their drugs, which have global demand for years to come.
Semiconductors
Digitalization, artificial intelligence, and data center expansion are fueling explosive demand for semiconductors. Industry leaders such as Nvidia and TSMC are well positioned to capture a large share of this growth.
2. Competitive Advantage and Barriers to Entry – Why Strong Positions Last
A growing market alone is not enough – investors must understand why a specific company benefits most from that growth, and why competitors can’t dislodge its position.
A strong competitive advantage and a high market share ensure that a company captures the lion’s share of industry growth.
Once a company achieves a leading position and builds protective moats around it, the position is difficult to challenge. These moats may include patents, scale advantages, high capital requirements, or regulatory hurdles.
Most importantly, it must be too costly or difficult for new entrants to compete effectively.
Typical competitive advantages and barriers to entry:
Technological edge
Patents, long learning curve, and expertise make imitation slow and costly.
Examples: TSMC, Disco Corporation.
Scale advantages
Large production volumes or a dense service network reduce unit costs, making it difficult for newcomers to compete profitably on price.
Examples: Costco, Cintas.
Network and installed base effects
A wide customer base and large installed equipment base generate recurring aftermarket sales in service and spare parts.
Examples: Atlas Copco, Safran.
Regulation and certifications
Required licenses and certifications can block new entrants from the market.
Examples: West Pharmaceutical, Deutsche Börse.
Data and ecosystem advantage
Large user bases and data sets improve service quality and value, attracting even more users and reinforcing market position. Ecosystems and integrations make switching providers difficult.
Examples: Microsoft, Alphabet.
3. Recurring Revenue – Predictability for Growth
Companies with recurring revenue models are far more resilient than those reliant on one-off sales. Long-term contracts smooth out economic cycles, improve cash-flow management, and strengthen customer relationships as partnerships continue year after year.
Many industrial companies design their business model so that the initial product sale is only the beginning of a long revenue stream.
Atlas Copco sells compressors, but their long-term maintenance and service agreements generate revenue throughout the equipment’s life cycle.
Safran applies the same principle in aerospace. The majority of its profits come from engine maintenance and spare parts over the 20-year lifespan of a narrow-body aircraft engine. Each new engine sale locks in decades of recurring service revenue.
4. Pricing Power and Customer Loyalty
Pricing power is the ability to raise prices without losing customers. It works when the product is critical for the customer yet represents only a small share of their total costs.
Price increases are one of the most effective ways to grow earnings – but they require highly competitive and indispensable products.
Strong customer loyalty reduces sales and marketing expenses. Loyal clients provide a stable revenue base, making profits more predictable and margins easier to sustain.
Customer value can be created in many ways. Some quality companies invest heavily in R&D, producing better products that justify premium pricing. Others focus on efficiency and cost consciousness – for example, Costco, which offers groceries at consistently low prices in exchange for a membership fee. Low prices attract more members, large volumes improve purchasing terms, and every new paying member strengthens Costco’s growth flywheel.
5. High-Return Growth Investments – Capital at Work for the Future
Quality companies don’t settle for defending their current position. They actively reinvest in developing their business. What matters is not the amount invested, but the efficiency of those investments – often measured by ROIC (Return on Invested Capital).
When each dollar invested generates returns far above the cost of capital, the company can compound value over time.
At Sifter, we prefer companies that reinvest profits back into their business rather than paying them out as dividends. We believe this builds a stronger foundation for competitive advantage and long-term earnings growth.
Quality companies consistently find attractive reinvestment opportunities – whether in R&D, expanding capacity, entering new markets, or through acquisitions.
This creates a snowball effect, where profitable investments drive earnings growth, enabling even larger investments in the future.
How Sifter’s Companies Are Expected to Grow (2025–2029)
Sifter Fund’s 30 holdings operate across 17 industries. Each has its own pace, cycle, and outlook. We forecast revenue and earnings growth for each company five years ahead and update our estimates quarterly.
Over the past five years (2019–2024), the revenue of the fund’s current portfolio companies grew at an average annual rate of 10.2%, while operating profit grew by 13.6% (CAGR).
For the next five years (2024–2029), we expect the current companies’ revenue to grow at an average annual rate of 7.6% and operating profit by 8.2% (CAGR).
Our current forecasts are slightly more cautious than before, mainly due to concerns about tariffs and trade tensions. However, there is room for positive surprises if global macroeconomic conditions turn more favorable.
Possible positive drivers:
- Smaller-than-expected impact from tariffs
- Tax cuts in the US
- Lower interest rates in the US and Europe
- Industrial recovery in the US
- EU recovery funds supporting European industries
- Semiconductor rebound from the current downturn
Of course, negative surprises are always possible, as the past five years have reminded us. Even so, many quality companies have continued to grow their revenue and earnings despite setbacks.
Finding a true quality company takes effort – but it’s worth it. When a business operates in a growing market, has durable competitive advantages, and generates stable cash flow, it’s a joy to own even when stock markets get jittery.
These companies provide peace of mind to investors and strong foundations for long-term value creation.
Santeri Korpinen
CEO
