Monopolies, continuing customer relations, especially diversified customer bases. Stable businesses with excellent pricing powers
The American company Verisign Inc, which manages .com and .net domain names, is a great example of a company that we want to own a part of. We look for companies with exceptionally strong revenue models.
Verisign’s profitability is second-to-none, as could be expected of a company that has the exclusive right to manage the world’s most popular domain names.
However, the annual cost of this to its customers is only around 10$, which is such a vanishingly small sum that few would even think about changing their domain name for this reason.
And none of its customers would ever think about abandoning their online presence, even if they needed to cut their costs.
In fact, it would be the very last thing that they would ever consider doing. Verisign’s business will remain stable, no matter the circumstances.
We seek out especially high-quality businesses
At Sifter, we do not look for inexpensive companies. We do not search for companies that exhibit only strong growth. We do not seek out companies whose shares have been on an upward trajectory as of late.
We do not care about the stocks that the average technical analysis would tell you is a must-buy.
We seek out especially high-quality businesses. We are focused on finding companies with strong earnings models.
If a company’s revenue model is better than anyone else’s, it can use its capital to generate better results than its competitors.
That is why various indicators for return on capital, especially return on capital employed, are vitals tools that allow Stocksifter to sift through the companies in the world for the best business ideas.
Strong earnings model provides high return of capital
Our process is based on data provided by Bloomberg, Factset and other international data providers, and we further refine this data for our purposes.
As an example, when we calculate a company’s return on capital, we deduct the funds that the company has on hand from its capital to avoid adversely affecting the ranking of any cash-rich companies.
This way, we can reveal a company’s true money-earning potential for the capital that it has invested in its business.
When we discover a company that possesses a revenue model that, based on historical figures, seems exceptionally strong, we begin investigating what makes that company tick.
What makes it so special, what forms its competitive edge?
A company’s revenue model can be based on, for example, its brand, corporate culture, technological advantage, or the experience that it provides to its customers.
If we do not understand a company’s revenue model, we will not invest in it.
The company’s historical figures may show that its revenue model has worked thus far. We estimate and analyze how its competitive edge will develop in the future.
For example, any competitive advantages that are based on technology are usually short-lived, whereas a company’s distribution, marketing or branding expertise can provide its owners with a long-term competitive edge.
We also investigate how the company has maintained its lead. Has it invested in targets that are relevant to its revenue model?
We monitor our investments and their earnings models constantly
If a company that we have invested in releases a less-than-stellar quarterly report, we will closely analyze whether this was the result of a momentary, random fluke, or if the company’s revenue model is beginning to crumble.
Any changes in a company’s competitive position or a lack of clarity in how it operates can threaten even the best revenue models.
The companies in our portfolio can never rest easy when it comes to being replaced by another potential investment target. If it seems that a company’s revenue model will soon begin to crack, it will be replaced by a newer, more attractive investment prospect.
This is how we can always ensure that our portfolio contains only the best businesses and revenue models in the world. When you focus on just the best companies, you can always sleep soundly at night.
CEO, Sifter Capital Ltd