- <\/ul>\n\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t
- The company\u2019s earnings model has clear competitive advantages <\/strong>that explain margins and profits that are higher than those of competitors.<\/li>
- The industry is growing \u2013 <\/strong>more than 60% of the company\u2019s future growth is attributable to industry growth.<\/li>
- The company\u2019s profits <\/strong>show stable growth and predictability for more than five years.<\/li>
- Revenue is recurring <\/strong>(licenses, maintenance services) \u2013 enables the stability of profits even during economic downturns.<\/li>
- High return on equity \u2013 <\/strong>when the return on invested capital (ROIC) is over 15%, it works wonders in terms of profitability over time.<\/li><\/ol>\n\n\n\n
Let\u2019s look at these criteria in the light of a real-world example.<\/p>\n\n\n\n
Case Starbucks \u2013 what is the effect of long-term investing in high-quality company?<\/h2>\n\n\n\n
When a company\u2019s profit performance is stable, we know it has the capacity to invest in growth through product development, marketing or geographical expansion, for example.<\/p>\n\n\n\n
High return on invested capital, in turn, tells us that the management has the ability and the resources to make profitable investments in future growth.<\/p>\n\n\n\n
For instance, Starbucks, the world\u2019s largest chain of coffee shops, has maintained a return on invested capital (ROIC) of 25\u201335% for the past 10 years.<\/p><\/blockquote>\n\n\n\n
In other words, the company has invested a significant proportion of its profits into its business by increasing the number of coffee shops, launching new products, expanding into China, and developing new digital services. The investments have been sound, as evidenced by the company\u2019s profits growing by an average of 16% per year (2010\u20132019) before the COVID-19 pandemic.<\/p>\n\n\n\n
The share price has followed the money, i.e. the company\u2019s growing profits.<\/p><\/blockquote>\n\n\n\n
![\"Starbucks](\"https:\/\/sifterfund.com\/wp-content\/uploads\/sifter-fund-starbucks-arvonkehitys-1024x455.png\")
<\/a>Sifter invested in Starbucks in January 2018 and made additional investments during Q2\/2020 and Q3\/2020. Image: stock value development of Starbucks (last five years).<\/figcaption><\/figure>\n\n\n\n Sifter Fund invested in Starbucks in January 2018 and made additional investments during Q2 and Q3\/2020. Although the coffee shop and restaurant business was hit hard by the restrictions introduced in response to the pandemic, Starbucks recovered surprisingly quickly. We believe the company was able to strengthen its competitive position during the COVID-19 pandemic and will be even stronger in the future.<\/p>\n\n\n\n
![\"Starbucks](\"https:\/\/sifterfund.com\/wp-content\/uploads\/starbucks-net-income-adjusted-2005-2021-1024x582.png\")
<\/a>The company’s investments have been good in the long-term, as the company\u2019s earnings have risen by an average of 16% a year (2010-2019), before the COVID-19 pandemic. Market estimate for the fiscal year 2021 is 3 340 mrd USD.<\/figcaption><\/figure>\n\n\n\n - The industry is growing \u2013 <\/strong>more than 60% of the company\u2019s future growth is attributable to industry growth.<\/li>
Five key quality criteria for long-term investors<\/h2>\n\n\n\n
We use the following five qualitative criteria to evaluate companies for our portfolio. We also have a long list of more detailed qualitative and quantitative criteria that every investor should take into account.<\/p>\n\n\n\n