Today we’re looking at what the true value of a portfolio is.

Many view the price as the true value of the portfolio, but is that fair?

Mr. Market is a manic depressive that changes his mind constantly.

We’ve seen it hundreds of times, a high quality business sells off due to a prevailing narrative.

Meta Platforms traded at a single digit multiple in 2022 after a series of bad news:

The stock sold off big time. So what did Meta do to change the trend? Nothing special, it continued to deliver solid growth, high margins, and produce high levels of free cash flows.

The price went up +700% in less than 3 years… Same business, but a radical different price.

This begs the question: Is price really a good measure of the true value of a portfolio?

If we look at the business, it most often hasn’t changed at all, even if the stock price has changed significantly.

After all, we’re trying to buy great businesses and be long-term business owners, not stock traders.

So, today, I want to show you how I look at the true value of the portfolio, and more importantly, how I evaluate if a purchase was successful or not.

A better way to look at the true value of a stock portfolio

The true value of the portfolio: earnings and free cash flows per share

I look at both, because free cash flows can be temporarily depressed due to large capex investments. And earnings can be more easily manipulated by accounting shenanigans.

Why focus on earnings and free cash flow per share?

The short answer: Earnings & free cash flows is the weighing machine, stock price is the voting machine. And in the long-term, the weighing machine wins.

In the long-run, the stock price will follow the growth in earnings. In the short-term, you have no control over how the market will price that growth.

Of course, we have to look at a broader picture, to consider how our portfolio is rated compared to other indexes like the S&P 500, MSCI world index and the ‘risk free rate’ of the 10 year treasury bond.

Factors worth tracking for your portfolio:

• The PE and FCF yield

• Compare PE and FCF to the S&P 500 and the MSCI world index

• Compare FCF yield to the risk free rate (10 year treasury bond yield)

• The expected future growth

• Compare it to the expected growth of the S&P 500, MSCI world index, and expected GDP growth globally or for the US.

Here is a overview how I compare my portfolio to the S&P 500:

Successful investments

So, we can’t control how the market rates our businesses, but we can control our entry price, or what multiple we purchase the business at.

Buying a great business at a high multiple is a high risk endeavors, we have the classic example of Microsoft, that used 16 years to regain its dot com bubble highs:

But buying a business at a low multiple can be just as unprofitable as buying Microsoft in 2000.

There are plenty of examples of former darlings that the market used to love, but just keep rating lower and lower.

A well known examples is Evolution AB. The market used to look at the business like an unstoppable force in a growing global market, rating the business at ~90x earnings at its peak.

90x, became 30x, 30x became 10x.

So, buying a business at low (or lower) multiples is not enough, we have to be right about the business, and the discount the market applies to the stock has to be overestimated.

So, entry price is important, and buying a quality business that will continue to grow its earnings and free cash flows per share over time is important.

In periods of multiple contraction, or when the stock price is selling heavily off, like we see in the software industry right now, how should we think about tracking the real performance of our portfolio?

Look-through earnings: The real scorecard

This brings us to a powerful tool for evaluating your portfolio: look-through earnings.

Warren Buffett introduced this idea in his 1989 annual report, specifically to help Berkshire Hathaway shareholders understand the true performance of their equity portfolio. The logic is simple: Rather than looking at what the market says your stocks are worth today, you add up your proportional share of the earnings of every business you own.

François Rochon, founder of Giverny Capital, has applied this framework for decades. As he explains:

This means that if you own 50 shares of a company, you are not holding a ticker symbol. You are a part-owner of a real, cash generating business.

These businesses have real customers, employees, and make real money.

The stock price only tells you what the market is willing to pay for one slice of this business on this day.

Look through earnings tells you what your slice of the business actually produces.

Rochon illustrates this with a simple example.

Imagine a $100,000 portfolio made up of:

• 2,000 shares of ABC (trading at $25 a share). Total value: $50.000

• 500 shares of XYZ (trading at $100). Total value: $50.000

ABC earned $2 per share, XYZ earned $8.

Multiply each by the shares you own, and your total owner’s earnings were $8,000.

The following year, ABC earned $2.40 and XYZ earned $9. Your owner’s earnings grew to $9,300.

This is a 16% growth rate, regardless of what either stock did in the market that year.

That 16% is the real scorecard. Not what Mr. Market said your portfolio was worth on any given Tuesday.

Why price alone is a terrible measure of performance

Buffett put it plainly:

The voting machine can be wildly irrational.

Rochon points to Coca-Cola as a perfect case study. In 2000, Coke traded at a PE of 41. 10 years later, the stock had barely moved:

Over that same period, earnings nearly tripled, a nine percent annual growth rate. The business did its job. The stock didn’t move, because investors in 2000 had massively overpaid.

As Charlie Munger said:

Two factors that determine intrinsic value

Rochon is direct about what actually drives intrinsic value, and he identifies two factors that the market frequently gets wrong.

The first is the future prospects of the business.

Earnings can grow 20% in a year, but if the underlying business model does not look sound over the next five years, that growth will prove temporary and should not be considered a true increase in intrinsic value.

This is why great investors spend most of their time on qualitative analysis: the moat, the management, the competitive dynamics, not just the spreadsheet or discounted cash flow analysis.

Determining future prospects is inherently subjective and imprecise, but it is the work.

The second factor is the price you pay.

If you pay too high a price relative to intrinsic value, even if intrinsic value grows at a good rate, you will not be rewarded by the market.

The Coca-Cola example above is the proof. Overpay at 41x earnings, wait twelve years as earnings triple, and still earn almost nothing. The valuation contraction absorbed all the compounding.

This is why entry multiple is something you can and must control. You cannot control how Mr. Market rates your businesses next year. You can control what you pay today.

How to use this in practice

Each year, calculate your portfolio’s total owner’s earnings. Add up your share of earnings across every position you hold.

Owner earnings can be calculated as follows:

• Earnings or FCF per share + dividend per share x # of shares

This can (And should) be done every quarter to keep track of your holdings.

Then compare that number to the prior year. That growth rate is your real return on the underlying businesses, independent of market noise.

Rochon does exactly this at Giverny Capital. As he writes:

For your own portfolio, you want to see:

• Owner’s earnings growing faster than your benchmark index (E.g. S&P 500 or MSCI World Index) underlying earnings growth

• A PE and FCF yield that is reasonable relative to the index and the risk-free rate

• Expected future growth that justifies the multiple you paid at entry

If those three things are true, you are in good shape, even if the market hasn’t recognized it yet.

Rationality in the face of volatility

The deepest benefit of looking through earnings is psychological. When you know your businesses are compounding earnings at 12-15% per year, a 30% market drawdown stops being terrifying and starts being an opportunity. You are no longer at the mercy of Mr. Market’s mood swings, because you have an independent measure of whether your investments are working.

Rochon makes this point directly:

Buffett has said the same thing for fifty years. The stock market exists to serve you, not to instruct you. If it offers you a great business at a silly price, buy more. If it prices your existing holdings at a premium to intrinsic value, enjoy the quotation and do nothing.

Concluding Thoughts

The true value of your portfolio is not the number on your brokerage screen this morning. It is the sum of what your businesses are earning on your behalf, growing year after year, compounding quietly regardless of what any market does on any given day.

Get the entry multiple right. Own businesses with durable earnings power and strong future prospects. Track your look-through earnings annually, not your portfolio price daily.

Do that consistently, and the market will eventually do the weighing, and the price will follow the earnings.

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May was a quiet month for the portfolio, up +2.05%.

After April’s strong recovery, May felt like the market taking a breather. The businesses we own kept doing what they do: compounding earnings, taking market share, and building their moats. The stock prices mostly moved sideways to slightly up, and that’s fine.

No positions were adde…

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Welcome to the May edition of Top 5 Buys ✅

You can access our Top 25 Buys for 2026 list as a premium member here.

Top 25 Buys 2026

In this article, we will discuss our top stock picks for May 2026.

Let’s get into it 👇

The Market Sentiment: Greed

After the chaos of April, tariff announcements, geopolitical noise, and a brief detour into Extreme Fear, the market has bounced back with surprising speed. Investor sentiment has settled around Greed, as the S&P 500 reclaims ground near all-time highs.

The investors who acted in April have already been rewarded. Now the question is whether this recovery holds, or whether the underlying uncertainty reasserts itself.

Honestly? It doesn’t matter that much. What matters is finding businesses that compound regardless of what the macro throws at them.

I can’t predict the future, but I can point to 5 quality growth businesses that continue to compound regardless of macro economics.

Here are this month’s Top 5 Buys 👇

This is not investment advice. Always conduct your own due diligence and make your own investment decisions.

Top 5 Quality Buys May 2026 🚀

#1 of 5🏛️ Kinsale Capital

Technology-Driven Insurance Compounder · $KNSL · Richmond, Virginia

E&S Insurance

Kinsale Capital ($KNSL) is the best business model in insurance. A pure-play Excess & Surplus (E&S) lines specialist that has turned underwriting into a competitive advantage. Since IPO in 2016, Kinsale has compounded shareholder returns 33.6% annually by doing something deceptively simple: insuring risks that standard carriers won’t touch, faster and cheaper than anyone else.

The E&S market exists because some risks are too unusual, complex, or volatile for standard insurance markets. Think cannabis businesses, cyber liability, construction projects in difficult environments, and emerging industries. It’s a great business to be in, if you can underwrite like Kinsale Capital does.

The Model: Tech Advantage in a Legacy Industry

The insurance industry runs on legacy IT. Old systems, slow quoting, manual underwriting. Kinsale built its entire platform from scratch, proprietary technology enabling faster quoting, better data capture, and more granular risk selection than any competitor. The result is a structural cost advantage. Kinsale’s expense ratio sits around 20–21%, this is one of the lowest in the E&S market. Combined with disciplined underwriting producing a combined ratio in the mid-to-high 70s, Kinsale is generating ROE consistently above 25–30%. Legacy competitors can’t close this gap. Their infrastructure is too expensive to replace.

Growth Drivers

• E&S market expansion: The E&S market has been taking share from standard lines for years as risk complexity grows. Kinsale is perfectly positioned as a pure-play operator.

• Technology flywheel: As Kinsale writes more policies, its data advantage improves. Better data → better pricing → better loss ratios → more capital to grow.

• Small-to-mid market focus: Kinsale targets smaller, more fragmented accounts where broker relationships are stickier and competition from large carriers is weaker.

• Investment income: A growing float invested at improving rates adds a compounding tailwind to earnings.

The Numbers

Kinsale is trading at its lowest forward PE in over a decade, of 14.77x.

Despite the historical low levels, it still trades at a premium to other insurance businesses, as it should, with much higher combined ratio, return on equity and growth.

The unit economics for Kinsale Capital is one of the most durable in financial services.

Bottom line

Kinsale is a rare investment case, a financial company with a genuine technological moat. Insurance is typically a commodity. Kinsale has made it a compounding machine by building technology that incumbents can’t replicate without tearing down everything they have. The E&S market is growing, the advantage is durable, and management has been disciplined throughout. This is the kind of business you want to own for a decade.

#2 of 5 🌸 Interparfums

Asset-Light Fragrance Compounder · $IPAR · New York, USA

Luxury Fragrance

Interparfums ($IPAR) is one of the best-kept secrets in consumer goods. It’s not a luxury house. It doesn’t own the brands. It licenses them, and that distinction is crucial.

The model is elegant: Interparfums signs long-term exclusive licensing agreements with prestigious fashion brands (Coach, Jimmy Choo, Montblanc, Kate Spade, Karl Lagerfeld, and more), then handles the creation, manufacturing, and global distribution of fragrances under those brands. The brand owner gets royalties without operational headaches. Interparfums captures the economics of luxury fragrance with a fraction of the capital intensity.

The Model: Licensing as Leverage

The fragrance business is incredibly attractive. Gross margins are thick, products have long shelf lives, gifting occasions are recurring, and prestige brands command premium pricing. The Coach license was just renewed through June 2031. A new license with Longchamp (through 2036) was signed in July 2025. The portfolio is diversifying and lengthening.

Growth Drivers

• Jimmy Choo franchise strength: The “I Want Choo” franchise is a genuine hit. Jimmy Choo is growing around 16% annually.

• New license pipeline: Longchamp launches in 2027. New brands entering the portfolio add future growth optionality.

• Global prestige fragrance tailwind: Consumer demand for prestige and luxury fragrance remains robust even as consumers become more selective elsewhere.

• Geographic expansion: North America, Western Europe, and Asia/Pacific all strengthened in 2024–2025.

The Numbers

2026 is a consolidation year by management’s own guidance, they’re laying the groundwork for a strong 2027 as new brands ramp. For long-term investors, that creates a window.

Combine this with the drop in valuation over the past years. Interparfums is now trading at a 7.92% forward free cash flow yield, and a 18.7x fwd. PE ratio, it’s cheapest valuation in over a decade:

Bottom line

Interparfums is a textbook asset-light compounder. It has captured the economics of luxury fragrance without the capital intensity of building a luxury brand. The licensing model is misunderstood by investors who worry about renewal risk, but the track record of renewals and an expanding portfolio makes this business far more durable than it appears. Patient investors who look through the 2026 consolidation year will likely be rewarded in 2027 and beyond.

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How FICO Makes Money

FICO is best understood as a toll booth on the American credit system.

Every time a bank, mortgage company, or auto dealer pulls a credit score to make a lending decision, there is a very high probability they are paying FICO a royalty. FICO invented credit scoring in 1989. The score became the industry standard because it works. It has been validated against hundreds of millions of loans over 35 years. And 90% of top US lenders still use it today.

The business has two parts:

Scores (about 55% of revenue)

FICO licenses its algorithm to the three credit bureaus (Equifax, Experian, TransUnion), who pass it on to lenders. FICO charges a royalty per score. The Scores business runs an operating margin of roughly 89%. Almost every dollar of price increase falls straight to the bottom line.

Software (about 45% of revenue).

The FICO Platform is an AI-powered cloud system used by banks, insurers, and telecoms to automate lending decisions, fraud detection, and collections. Platform ARR is growing fast and is the company’s reinvestment engine.

FICO has compounded by 21.9% annually since its inception in 1990, despite its recent -48% sell off:

The Moat: Toll Booth

The core of the FICO moat is what investors call standard-setting lock-in. When a product becomes so embedded in an industry’s processes, regulations, and infrastructure that switching becomes expensive, even when a cheaper alternative exists.

Layer 1: Woven into regulation

The FICO Score is not just widely used. It is built into federal lending guidelines, Fair Housing Act compliance frameworks, and the investor documentation behind the $10+ trillion US mortgage-backed securities market.

When a fund manager in Tokyo buys a US mortgage security, credit quality is expressed in FICO scores. When a bank’s compliance officer certifies lending standards, FICO is the measuring rod. Replacing it requires re-underwriting historical loan performance, retraining models, renegotiating investor documentation, and convincing regulators. None of this happens quickly.

Layer 2: 70 years of proprietary data

FICO has been in credit analytics since the 1950s. Its models have been trained and refined against more loan outcomes than any competitor can replicate. An independent study published in 2025 found FICO Score 10T is the most predictive score for first-time homebuyer mortgages. In finance, that edge matters. A slight improvement in default prediction saves large lenders hundreds of millions per year.

Layer 3: Extraordinary Pricing power

This is the clearest proof that the moat is real. FICO has raised its mortgage royalty repeatedly and aggressively, with lenders complaining the entire time. And yet the price keeps going up.

Why can FICO keep raising prices? Because the math is simple. On a $400,000 mortgage, a $15 credit fee is not the variable that drives the decision. As FICO’s own EVP put it: their royalty represents approximately two-tenths of one percent of total mortgage closing costs.

The lobbyists complain, but lenders pay.

The Risk You Cannot Ignore

Here is the real bear case, and it deserves a serious hearing.

On July 8, 2025, the FHFA officially allowed mortgage lenders to use VantageScore 4.0 alongside Classic FICO when originating loans for Fannie Mae and Freddie Mac. FICO stock fell nearly 19% in a single session. In March 2026, another 9% drop followed as the credit bureaus (who own VantageScore) began offering it at $1 per score versus FICO’s $4.95.

VantageScore is a joint venture of Equifax, Experian, and TransUnion. The same bureaus that distribute FICO scores own a direct competitor. Their economic incentive to steer lenders toward VantageScore is obvious.

This is a legitimate, structural risk. Not a temporary headwind.

What makes it more complicated:

The FHFA mandate allows VantageScore, but it does not require it. Re-tooling mortgage underwriting systems, retraining credit analysts, and updating compliance frameworks takes years. CEO Will Lansing has faced this question publicly for 15 years:

The numbers still back him up. B2B Scores revenue grew 42% in Q3 FY2025 even after the VantageScore announcement.

The concern is trajectory, not today’s share. The bureaus pricing VantageScore at $1 is predatory. If lenders start accepting it for non-GSE lending first, and then GSE lending, the long-term price ceiling for FICO scores comes down. This is a multi-year risk to watch, not an immediate catastrophe, but a real challenge to the pricing power that has driven so much of FICO’s earnings growth.

The Software Business: What the Bears Miss

When people debate FICO, they focus almost entirely on Scores. The Software segment is becoming very interesting.

FICO Platform is an enterprise AI decisioning system. Banks use it to automate loan origination, fraud detection, and collections. Insurers use it for underwriting. Telecoms use it to manage credit exposure. T-Mobile recently deployed a FICO Platform solution it says transformed its onboarding capabilities for connected device financing.

Platform Dollar-Based Net Retention Rate is 136%. That means existing Platform customers spend 36% more each year, on average. Enterprise software companies with NRR above 120% are considered elite. FICO Platform is delivering at a level that suggests real product-market fit, not just price increases.

The migration story matters too. Non-platform software ARR is declining as legacy customers move to Platform. This creates a short-term ARR headwind but a long-term margin expansion story, as SaaS recurring revenue is more predictable and higher lifetime value than old-school licenses.

FICO’s financial profile is unusual. The company carries net debt, largely from aggressive share buybacks. But the Scores business generates so much free cash flow that this is manageable.

In fiscal year 2025:

• Revenue: $1.99 billion, up 15.9%

• Free cash flow: $769.9 million, up 23.4%

• Diluted EPS: $26.54, up 29.78%

• Shares bought back: $1.58 billion worth

Note the share count. FICO has been buying back stock aggressively for years. The per-share economics compound faster than the headline revenue numbers suggest. Aggressive buybacks works out great when the stock price is fair, but when multiples get extreme (like in 2024-2025) the capital allocation is questionable.

In Q2 FY2026, FICO deployed $606 million in buybacks in a single quarter, the largest in company history, plus $170 million more after quarter-end. At a stock price around $1,100 at the time, that is a significant signal from management.

The Scores segment runs at roughly 89% operating margins. The non-GAAP operating margin for the company overall reached 58% in recent quarters. Trailing four-quarter free cash flow as of Q2 FY2026 was $867 million, up 28%.

Growth: Where Does It Come From Here?

FICO’s revenue growth has three drivers.

Volume

More credit pulls as the economy grows, housing activity recovers, and auto financing continues. This is modestly positive and relatively predictable.

Price

FICO has raised mortgage royalties four times in its history, three of them in the last three years. The VantageScore threat limits how aggressively this continues in mortgages, but there is real runway in auto, card, and personal loan markets, where pricing has been flat for years. B2C direct consumer pricing is also under monetized.

Platform growth

With Platform ARR growing 49% and NRR at 136%, this segment is in the early stages of its potential. FICO’s installed base of enterprise clients is enormous. Attaching more Platform use cases to existing relationships is a multi-year growth driver that doesn’t depend on credit cycle dynamics at all.

Consensus estimates point to roughly 15 to 18% EPS growth over the next two years. Given the buyback program reducing the share count by about 2.5% annually, free cash flow per share growth will run above headline revenue growth.

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Valuation

At roughly $1,236 per share (May 2026), FICO trades at:

• 25x forward earnings

• 32% below its 10-year average multiple of 37x

• 69% below the September 2024 peak

Here are my scenarios for FICO:

The base case: continued double-digit growth from scoring volume and Platform expansion, with a modest re-rating toward (but not back to) historical averages, generates attractive returns from today’s price.

The bear case requires a collapse in Scores pricing power AND the Software segment stalling AND the market assigning a sub-25x multiple to a still-cash-generative business. That’s a lot going wrong simultaneously.

Three Assumptions for a Fantastic Outcome (+15-20% CAGR) 🚀

For FICO to compound at 15 to 20% per year from here, three things need to go right.

Assumption 1: VantageScore adoption stays slow for 5+ years.

The regulatory door is open, but building a new standard takes decades. If mortgage lenders move slowly (which history strongly suggests), FICO’s B2B Scores revenue continues to grow even at flat pricing. Price increases in auto and card scoring (where VantageScore has no regulatory mandate) provide an additional tailwind. This alone could add 8 to 10 percentage points to annual EPS growth.

Assumption 2: FICO Platform becomes a $1B+ ARR business by 2028.

Platform ARR is $349 million today, growing at 49% with 136% net retention. If growth slows to a still-excellent 30% per year, Platform hits $1 billion ARR by late 2027 or early 2028. At Software margins that are expanding as the mix shifts to SaaS, this would add meaningful earnings power and justify a higher quality multiple across the whole business.

Assumption 3: Management keeps returning capital aggressively at depressed prices.

The Q2 FY2026 buyback of $605 million in a single quarter (when the stock was near multi-year lows) is the kind of capital allocation that creates enormous per-share value. If management continues deploying $1+ billion per year in buybacks at depressed prices and the business keeps growing, the per-share earnings math becomes very compelling very fast. EPS in FY2028 in this scenario could reach $55 to $60, versus ~$32 today.

None of these assumptions require anything extraordinary. They require the business to keep doing what it has done for 30 years, while management continues to be disciplined with the cash it generates.

What Must Be True for the Base Case

Even for the base case to work, you need to believe:

FICO’s VantageScore headwind plays out slowly, not suddenly. The operating evidence today: 42% B2B Scores growth in Q3 FY2025, strong Q1 FY2026 results, supports the slow-transition view.

Pricing power survives in non-mortgage markets. Auto, card, and personal loan scoring have seen almost no price increases. These are large markets where FICO’s position is equally dominant.

The FICO Platform compounds. With 136% NRR and 49% ARR growth, this is the kind of business that can grow for years inside an existing customer base.

Management keeps allocating capital well. Will Lansing has run this company since 2007. The buyback program has been consistent and value-accretive for years.

The Bear Case Simply Put

The bureaus own VantageScore. They will subsidize it at $1 per score because every FICO score they displace is economics that stays inside their ecosystem. Over 5 to 10 years, lenders adopt VantageScore for more and more use cases. FICO’s pricing power erodes. Revenue growth slows from mid-teens to mid-single digits. The stock, previously priced as a quality compounder at 40 to 50x earnings, re-rates to 20 to 25x. You get a decade of flat returns.

This scenario is what the stock is partially pricing today. It is not crazy. It requires close monitoring.

Concluding Thoughts

FICO invented credit scoring, became the universal language of creditworthiness in the world’s largest economy, and spent three decades building a pricing moat so strong it can charge $4.95 for something that costs almost nothing to produce.

The VantageScore threat is real. The regulatory environment is hostile. The stock got expensive at the peak.

But at 25x forward PE, 48% below its peak in 2024, with an $867 million free cash flow machine, management buying back stock at the fastest pace in the company’s history, and a Platform business growing at nearly 50% per year, the risk-reward looks more interesting than the narrative suggests.

This is not a set-and-forget holding. The VantageScore situation requires active monitoring. If adoption accelerates and Scores pricing starts to compress meaningfully, the thesis weakens. But the bears are pricing in a level of structural decline that the current operating numbers do not support.

FICO is not a broken business, yet. Currently it is discounted. Whether that discount is temporary or permanent is a question that will take 3 to 5 years to answer fully.

Whether I decide to start a position in FICO remains to be decided, you can follow the Quality Growth portfolio and get premium content by becoming a member today:

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Ready to take the next step? Here’s how I can help you grow your investing journey:

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Disclaimer:

This newsletter is for informational purposes only and does not constitute financial, investment, or other professional advice. The views expressed are solely the author’s opinions and may change without notice.

Investing in securities involves risk, including the potential loss of capital. Past performance is not indicative of future results.

The author may hold positions in securities mentioned. Readers should do their own research and consult a licensed financial advisor before making investment decisions.

I don’t buy stocks I’m not ready to own for a decade. But that doesn’t mean I stop looking.

There’s a list I keep of companies that have passed my initial quality filter, that I’ve spent real time understanding, but that I haven’t pulled the trigger on yet. Either the price isn’t right, or I’m still working through a question I can’t fully answer, or I’m simply being patient.

Today I want to share five names sitting on that list right now. These aren’t speculative ideas. Every one of them has a durable competitive advantage I can articulate clearly, a management team that allocates capital like an owner, and a business model I’d be comfortable holding through a downturn.

What they don’t all have yet is the right entry point.

1. FICO: The toll road nobody talks about

If you’ve ever applied for a mortgage, a car loan, or a credit card in the United States, FICO scored you. You probably didn’t think about it. Neither did the lender. That’s exactly the point.

Fair Isaac Corporation sits in one of the most enviable competitive positions in American finance. Its FICO Score is embedded so deeply into the credit decisioning infrastructure of US lenders that replacing it isn’t a technology problem, it’s a coordination problem. Every major lender uses it. Every regulator references it. Every consumer knows their number. The network is the moat.

What makes FICO genuinely interesting right now isn’t the scoring business alone. It’s the transition happening underneath it. The company has been transforming its software division into a subscription-based SaaS platform. Revenue from this segment is becoming stickier, more recurring, and higher margin. And then there’s the pricing story: FICO charges mortgage lenders a fee each time a score is pulled, and that fee has been going up, meaningfully, year after year. The lenders complain. They always complain. But they keep paying.

Put all three together, the scoring monopoly, the software platform transition, and demonstrated pricing power, and you get a business that has compounded both earnings and free cash flow at a remarkable rate for nearly a decade.

The SaaS platform ARR tells an equally compelling story. Platform ARR has grown from $47.7M in 2021 to $348.8M LTM, a near 7x increase in four years.

Meanwhile, Dollar-Based Net Retention on the platform sits at 136% LTM, meaning existing customers are spending significantly more each year.

FICO has traded at astronomic multiples in the last few years, but now FCF yields are at multi year highs, giving investors a opportunity to both get earnings/fcf growth and multiple expansion if the investment case turns out bullish.

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Here’s something I used to do every time I started researching a new stock.

I’d open the annual report. Read 40 pages of reporting jargon. Open a competitor’s filing. Try to hold both in my head simultaneously. Build a rough DCF in a spreadsheet. Go back and re-read the sections I’d already forgotten.

It worked. But it took forever. And the result was only great if I spent significant time and effort to make it happen.

Now I do most of that groundwork in Claude. Not because AI replaces my thinking (it definitely doesn’t), but because it dramatically accelerates the legwork so I can spend more time on what actually matters: forming a strategic long-term view of the business and if it fits into my portfolio.

This guide shows you exactly how I set it up. You can steal every prompt if you want to. I’ll use Constellation Software (CSU) as the running example throughout, since it’s a stock many of you know well and it’s a great test case for quality compounder analysis.

The setup in Steps 1–2 takes about 10 minutes once. After that, each new stock research session takes 5 minutes to get to a point that used to take 3-5+ hours.

Why Most Investors Use AI Wrong

If you’ve opened Claude or ChatGPT and typed “Tell me about Constellation Software,” you’ve experienced the problem.

You get a fluent, confident, surface-level summary. It reads well. It tells you nothing you couldn’t find on the Wikipedia page. It’s almost useless for serious investing.

Claude out of the box is a general-purpose assistant. It doesn’t know you’re a quality-focused investor who cares about ROIC, capital allocation, and durable competitive moats. It doesn’t know what you already know, what your investment horizon is, or what you’re trying to decide.

The difference between a generic AI response and a genuinely useful research session is context and structure. That’s what this guide is about.

The 5-Step Setup

Step 1: Choose the Right Tool and Plan

I use Claude’s pro plan to get access to the most powerful AI model. This guide will revolve around Claude. I’ve used multiple AI Models, but nothing comes close to Claude in my opinion.

Here’s why this matters for investors:

• Claude handles very long documents better than most alternatives. You can paste or upload an entire 100+ page annual report and have a coherent conversation about it.

• The Pro plan gives you access to Claude’s most capable models with a significantly larger context window. This is critical when you’re working with 10-Ks, earnings transcripts and competitor filings simultaneously.

• Claude tends to be more careful about expressing uncertainty than alternatives, which matters when you’re making real financial decisions.

Important caveat

Claude’s knowledge has a training cutoff. It will not know last quarter’s earnings. Always provide recent documents yourself rather than relying on Claude’s own knowledge of current financials.

Step 2: Write Your Investor Identity Prompt

This is the most important step in the entire guide. If done right, it transforms Claude from a generic assistant into something that thinks like your analyst and provides tremendous value.

At the start of every research session, paste this prompt (customised to you) before you do anything else. It primes Claude with your investing philosophy, your framework, and the level of analysis you expect.

PROMPT 1: Your Investor Identity (customise and save this)

Save this as a text file and paste it at the start of every new conversation. It takes 10 seconds and it changes everything.

Step 3: The Annual Report Deep-Dive

Now the real work begins. Upload or paste the company’s most recent annual report (or 10-K for US companies). For CSU, this is their annual letter to shareholders plus the full financial statements.

Don’t ask Claude to “summarise” it. That’s the generic approach that gives you generic results that are low value. Instead, use a structured prompt that mirrors how a good analyst actually reads a filing.

PROMPT 2: Annual Report Deep-Dive

This prompt alone will get you 80% of the way through a first-pass analysis. The output won’t be perfect, but it will be structured, consistent to the framework you want, and far faster than reading the full document yourself from scratch.

Step 4: The Red Flag Check (Steelman the Bear Case)

This is a crucial step, and will often be extremely valuable.

After you’ve built a positive view of a company, confirmation bias kicks in hard. You start reading everything through a bullish lens (I’ve fallen into this trap many times). Claude can help you fight this by being instructed to argue against you.

PROMPT 3: Steelman the Bear Case

The quality of Claude’s bear case will depend heavily on the quality of the document you gave it. If you also upload a short-seller report or a critical analyst note, add that to the conversation before running this prompt.

Step 5: Build Your Valuation Scenarios

I don’t use Claude to build my actual discounted cash flow. I do that in a spreadsheet where I control the inputs. But I use Claude to stress-test my assumptions before I build it, this catches lazy thinking before it manifests into a valuation model.

PROMPT 4: DCF Assumption Stress Test

Fill in your own numbers before running this. The output gives you a structured framework you can take directly into your spreadsheet model.

The result from my Constellation Software examples 👇

Claude acts as my sparring partner for my assumptions, giving me pointers to consider for each of the assumption I have given it.

This is how I would proceed:

Claude then does the calculations based on my inputs, and creates visuals and graphs to make it more professional looking.

I would follow this up with a sensitivity analysis to better understand how movements in FCF per share growth and FCF yield will affect the return.

Note: Always give Claude current numbers like today’s stock price, or for this case, today’s FCF yield.

My prompt (Claude now has all the context, and you can ask it to do what you want and get accurate results):

How awesome is that?

I now have a well put sensitivity analysis on Constellation Software that is basically ready for presentations or a report.

If you want it in excel or Power Point format, you can just ask Claude to create the document for you with the proper formatting.

This used to take an analyst hours to do. Claude can now do this for you in a few minutes, with the right prompts and correct reporting documents.

After you’ve done this one time, this process will take you less than 5 minutes, and you can refine the prompts over time to fit your style or needs.

The Prompt Playbook: Save These

Here are three additional prompts I use regularly that didn’t fit into the five steps above. These are worth saving to a text file alongside your identity prompt.

Competitive Comparison

PROMPT 5: Head-to-Head Competitor Analysis

Earnings Call Analysis

PROMPT 6: Earnings Call Deep-Read

Initial Screening

PROMPT 7: 5-min analysis (before deep research)

What Claude Can’t Do (Very important)

This section matters as much as the prompts.

• Claude can hallucinate specific numbers. Always verify financial figures against the source document. Never use a number Claude states without checking the original filing.

• Claude doesn’t know what happened last quarter. Its training has a cutoff date. For anything recent, you must provide the documents yourself (I prefer to always provide documentation).

• Claude can’t tell you what a stock is worth. It can help you stress-test assumptions, but the judgment call on valuation is yours.

• Claude is susceptible to the quality of what you give it. A well-written, honest annual report produces better analysis than a PR-heavy one. Garbage in, garbage out.

• Claude doesn’t replace pattern recognition built over years of reading businesses. It accelerates research. The decision maker and analyst is still you.

• Claude and AI is a tool that can enhance a great thinker into an exceptional one. By taking the grunt work for you, it frees up time to focus on the truly important questions.

The right mental model

Think of Claude as a very well-read intern who has read everything but experienced nothing. They can synthesise documents faster than any human, structure frameworks clearly, and challenge your thinking. But they have no skin in the game, no track record, and no judgment built from watching businesses succeed and fail over decades. That judgment is yours.

Where to Start Today

Don’t try to implement all five steps at once. Here’s the minimum viable version:

1. Copy Prompt 1 and customise it to your own investing philosophy. Save it as a text file.

2. Pick a stock you already know well and upload its latest annual report.

3. Run Prompt 2 and Prompt 3 back to back. See whether the analysis surprises you, and whether it catches anything you missed.

That’s it. The whole thing takes 25 minutes for a stock you’re already familiar with. Once you’ve done it once, the workflow becomes second nature.

If you build something useful on top of this, a prompt I haven’t included, a workflow that works better for a specific type of business, leave it in the comments below or reply to this email.

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Marius

Whenever you are ready, this is how I can help you:

1. Go Premium to access exclusive content & follow our market-beating Quality Growth portfolio. Read more here.

2. Essentials of Quality Growth — Join more than 300 investors who have bought the guide. Essentials of Quality Growth Investing is a multi-step guide for building a stock market portfolio of 10-20 high-performing quality compounders.

3. (Free) Valuation Cheat Sheet — Learn an easy and reliable method of valuing a business. Learn how to set a margin of safety for your investments.

4. (Free) How to identify a compounder — Learn how to effectively look for great companies that you can buy and hold for the long term.

5. (Free) How to analyze the financial statements — Learn how you read & analyze the balance sheet, income statement, and cash flow statement.

6. Promote yourself to +15.000 stock market investors (42% open rate) — Contact us via: investinassets20@gmail.com

Warren Buffett has spent decades looking for one thing: businesses that can stay profitable for years, even when competitors try to steal their customers.

He calls this advantage a “moat.”

Think of medieval castles. The wider and deeper the moat around the castle, the harder it was for invaders to get in. Same with businesses. The stronger their competitive advantage, the harder it is for rivals to chip away at their profits.

Here’s the thing most investors miss: not every successful company has a moat. Some businesses are great today but vulnerable tomorrow. Others look boring but are practically impossible to displace.

The difference? Five questions.

Question 1: Can Competitors Easily Copy This?

This is where most companies fail the moat test.

If a rival can replicate your business model in six months, you don’t have a moat. You have a head start. And head starts evaporate fast.

Take restaurants. You can copy almost anything—the menu, the decor, the service style. That’s why most restaurants struggle to maintain high margins. There’s always another spot opening down the street.

Compare that to Visa. Good luck building a competing payment network. You’d need to convince millions of merchants and billions of consumers to switch. Even with unlimited money, it would take decades.

The pattern: Patents, proprietary technology, massive scale, or network effects create moats. Execution alone doesn’t.

Question 2: Would Customers Care if This Company Disappeared?

Brutal question. But it cuts right to the core.

If your business vanished overnight, would customers scramble to find you? Or would they shrug and buy from whoever’s convenient?

Coca-Cola passes this test easily. People have emotional connections to the brand. They’ll pay more for Coke than generic cola, even when the taste difference is minimal. That’s pricing power—the ultimate sign of a moat.

Airlines? They fail hard. Nobody cares which airline they fly. They just want the cheapest ticket. That’s why airlines have such terrible economics despite moving millions of people every day.

The test: If customers view your product as interchangeable with competitors, you’re a commodity. Commodities don’t have moats.

Question 3: Does the Company Have Pricing Power?

Here’s the simplest moat test: If they raised prices 10% tomorrow, would customers keep buying?

Apple can do this. They’ve done it repeatedly with iPhones, and people keep lining up. That’s a moat.

Most retailers can’t. Raise prices and shoppers just go next door. That’s the absence of a moat.

Pricing power shows up in the numbers. Look at gross margins over time. Companies with moats maintain or grow their margins. Companies without moats see margins slowly erode as competition forces prices down.

Fico is a great example of pricing power and increasing gross margins:

Costco is also interesting. They deliberately limit their pricing power—they cap markups at 14% on branded goods and 15% on their Kirkland private label. But this constraint is actually their moat. By committing to low prices, they’ve built customer loyalty so strong that their membership renewal rate exceeds 90%. Members know Costco won’t gouge them, so they keep coming back.

The insight: Real pricing power means you can raise prices without losing customers. If you can’t, your moat is weak or nonexistent.

Question 4: Are Returns on Capital High and Staying High?

This is where finance meets reality.

Return on Invested Capital (ROIC) measures how much profit a company generates from every dollar it invests in the business. High ROIC companies turn money into more money efficiently.

We know that high ROIC businesses perform much better than their low-ROIC counterparts:

But here’s what matters for moats: consistency.

Companies with real moats maintain high returns on capital year after year. Why? Because their competitive advantages protect them from the usual pattern where high returns attract competition and drive returns back down.

Look at Microsoft. For decades, they’ve generated returns on capital well above 20%. Competitors try to chip away at Office, Windows, and now Azure, but Microsoft’s ecosystem moat keeps the profits flowing.

Compare that to most retailers or manufacturers. They might have one great year with high returns, but then competition catches up and returns fall. That’s capitalism working—but it also signals no moat.

The data: According to research from Missouri State University, companies with wide economic moats consistently outperform companies with no moat. The difference isn’t subtle. It compounds over decades.

Here are the highest ROIC industries for US companies:

Question 5: Is the Moat Getting Wider or Narrower?

Moats aren’t static. They’re always changing.

Buffett himself says moats are either widening or shrinking, even when the changes aren’t obvious in the short run.

Here’s a breakdown from Morningstar on different moat types:

From the data, wide and narrow moat businesses outperform the no-moat companies significantly.

Amazon’s moat has widened dramatically. Every new Prime member makes the service more valuable. Every third-party seller on the platform gives customers more options. Every AWS customer makes Amazon’s cloud business harder to displace. The feedback loops compound.

Traditional retail banks? Their moats are shrinking. Fintech companies can now do most of what banks do—and they’re doing it cheaper and faster. The regulatory moat banks once enjoyed is eroding.

The question: When you look at a company, ask yourself: will their competitive advantage be stronger or weaker in five years?

If you want to get deeper into this subject, I highly recommend Measuring the moat by Mauboussin.

Real World Examples

Let’s apply this framework:

Costco - Wide Moat:

• Can’t copy the scale advantages and buying power (Question 1)

• Customers love the treasure hunt experience and low prices (Question 2)

• Membership model locks in recurring revenue, 90%+ renewal rates (Question 3)

• Consistent returns year after year (Question 4)

• Global expansion and e-commerce growth widening the moat (Question 5)

Apple - Wide Moat:

• Brand built over decades, impossible to replicate (Question 1)

• Emotional connection drives customer loyalty worldwide (Question 2)

• Can charge premium prices vs. competitors (Question 3)

• Maintains high margins despite intense competition (Question 4)

• Brand strength endures across generations (Question 5)

Most Airlines - No Moat:

• Easy to replicate business model (Question 1)

• Customers just want cheap tickets (Question 2)

• Zero pricing power, constant fare wars (Question 3)

• Returns on capital barely cover cost of capital (Question 4)

• Competition keeps intensifying, any advantage is short lived (Question 5)

Why This Matters For Your Money

Companies with wide moats compound returns over decades.

Think about it: if a company can maintain high returns on capital while reinvesting profits back into the business, shareholders win. The returns compound.

Research from Morgan Stanley shows that companies sustaining ROIC above their cost of capital for longer than the market expects generate significantly higher returns for shareholders. These are the “compounders” that create generational wealth.

But companies without moats are traps. They might look cheap on a P/E ratio, but cheap isn’t enough if profits are about to get competed away.

This is why we’re very careful about buying bargain stocks. The price often reflects the quality (But not always).

Conclusion

Five questions. That’s all you need.

Can competitors copy this? Would customers care if it disappeared? Can they raise prices? Are returns staying high? Is the moat widening or shrinking?

Get these right, and you’ll avoid most bad investments.

Because in the end, capitalism is brutal. High profits attract competition like blood attracts sharks. The only defense is a moat wide enough to keep the sharks out.

Most companies don’t have one. The ones that do are worth finding—and holding onto.

Whenever you are ready, this is how I can help you:

1. Go Premium to access exclusive content & follow our market-beating Quality Growth portfolio. Read more here.

2. Essentials of Quality Growth — Join more than 300 investors who have bought the guide. Essentials of Quality Growth Investing is a multi-step guide for building a stock market portfolio of 10-20 high-performing quality compounders.

3. (Free) Valuation Cheat Sheet — Learn an easy and reliable method of valuing a business. Learn how to set a margin of safety for your investments.

4. (Free) How to identify a compounder — Learn how to effectively look for great companies that you can buy and hold for the long term.

5. (Free) How to analyze the financial statements — Learn how you read & analyze the balance sheet, income statement, and cash flow statement.

6. Promote yourself to +25.000 stock market investors (42% open rate) — Contact us via: investinassets20@gmail.com

April was a good month for the portfolio, up +12.34%.

After a bruising March, where tariff uncertainty and macro repricing hit almost every position, April delivered a meaningful recovery. The businesses we own kept compounding. The market started paying attention again.

No positions were added or removed. The portfolio remains concen…

Read more

Today we’re breaking down a quality darling trading at its cheapest valuation in a decade.

Most investors don’t pay attention to Copart.

It’s a company that picks up totalled cars, stores them on land it owns near every major city in America, and sells them at online auction to a global network of 300,000 registered buyers.

They don’t have any exciting AI products, they don’t go viral, and there is nothing fancy about the business. They make money on crashed cars, owned real estate, and a marketplace that has compounded for four decades, run by a family with deep expertise in the industry.

And right now, for the first time in roughly ten years, it’s trading at a 30–35% discount to its long-term average valuation multiples.

The stock is down ~40% from its all-time highs. Two real headwinds have arrived simultaneously. And management just deployed $1.12 billion buying back its own shares in under 90 days.

This is the full breakdown. Let’s get into it. 👇

How Copart makes money

When your car is totalled in an accident and your insurance company decides it isn’t worth fixing, they need to get rid of it. They call Copart.

Copart sends a truck to pick it up, stores it at one of their 250+ yard locations across 11 countries, lists it on their online auction platform, and sells it to the highest bidder. This could be a dismantler in Texas, a rebuilder in Poland, a parts dealer in West Africa, or a mechanic in the Middle East looking for a repairable car.

For this service, Copart charges fees to both the seller (the insurance company) and the buyer. Crucially, they don’t own most of the vehicles, they operate the marketplace on a consignment basis. The seller keeps the proceeds minus fees. Copart keeps the fees.

This model produces economics that would be extraordinary in any industry. In a business that involves physically moving crashed cars around, Copart runs:

• 42% EBITDA margins

• ~32% return on invested capital

• $1.4B of free cash flow on $4.6B of revenue

• $5.1B of cash on the balance sheet with zero meaningful debt

For context, Mastercard, widely considered one of the best business models in the world, runs about 57% EBITDA margins. Copart runs 42% picking up cars from people’s driveways. It is one of the most capital-efficient physical businesses in public markets.

The Moat: A tale of Five Layers

Copart’s moat consists of five layers that create a resilient and sustainable competitive advantage. The five layers compound and build on each other.

1. Physical land ownership

Copart owns the land its salvage yards sit on. More than 250 locations, the majority owned outright rather than leased. Getting a salvage yard permitted near a major metropolitan area takes years of regulatory work, community relations, and capital. You simply cannot replicate this network by writing a cheque. It took Copart four decades to build.

This also explains one of the most interesting strategic moves in recent memory: Copart holds hundreds of acres of otherwise idle land specifically reserved for hurricane-season vehicle storage. That land sits empty, generating zero revenue, until a major storm hits and suddenly becomes the most valuable real estate in the country. No competitor can do this because no competitor has been building this long enough.

2. The digital auction platform, years ahead

Copart moved to an exclusively online auction platform in 2003. Their only real competitor, IAA (now owned by RB Global), was still running physical auctions until COVID forced their hand in 2020. That is a 17-year head start on building a global digital buyer base, an online-first culture, and decades of auction data.

That data advantage matters more than it looks. Every auction outcome: what vehicle, what condition, what buyer, at what price, feeds back into search results, recommendations, and AI-powered tools. A competitor starting today would need years just to replicate the data, let alone the buyer habits.

3. +300,000 global buyers

Copart has 300,000 paying registered members from virtually every non-sanctioned country in the world. International buyers now account for roughly 40% of US vehicles sold and nearly 50% of auction value.

Why does this matter? International buyers pay more. On average, the vehicles purchased by international buyers are 38% more valuable than those purchased by domestic buyers, because they’re shipping them across an ocean, which only makes economic sense for higher-quality vehicles. These buyers pay freight cost, import duties, and logistics, and they do it because Copart’s auction depth gives them confidence they’re getting fair market value.

CEO Jeff Liaw puts it simply: “Liquidity begets liquidity.” More buyers produce higher prices, which attract more sellers, which attract more buyers. Every Copart auction you participate in as a buyer increases the platform’s value for every other buyer. This is a textbook network effect, running inside a business that buys crashed cars.

4. Proprietary data

Copart employs approximately 1,000 engineers, a number that would be notable for a tech company, let alone a salvage auction business. They’ve deployed LLM-powered total-loss decision tools that help insurance carriers make instant total-loss calls from a small sample of vehicle photos. These tools are trained on millions of historical auction outcomes that nobody else has. Two full years into deployment, they’re still expanding.

5. Title Express

When a car is totalled, the insurance company needs to obtain the vehicle title from the bank (if there’s a loan) or the owner. This sounds mundane. It is, in practice, the critical bottleneck that determines how quickly the whole claim resolves.

Copart’s Title Express platform is 5x larger than any competitor’s and delivers cycle times 10 days faster than insurance carriers can achieve on their own. Ten days sounds small. On a ~$15,000 vehicle with daily storage costs, ten days faster means real money saved per claim, multiplied across millions of claims per year. This is the operational advantage that keeps carriers coming back. The one that’s hardest for IAA to replicate because it’s built on scale and purpose-built technology.

Structural Tailwind: Why Cars Keep (And will continue to keep) Getting Totalled

Here is the most important insight about Copart’s business, and the reason this company has compounded for 40+ years despite declining accident rates.

Total loss frequency: the percentage of accident-involved cars that get written off rather than repaired has been rising relentlessly for four decades:

Year Total Loss Frequency according to CCC Crash Course 2026 report:

• 1980 ~4%

• 1990 ~5%

• 2000 ~10%

• 2015 15.6%

• 2025 23.1%

That’s a nearly 6x increase since 1980, and the trend shows no sign of reversing. The CCC 2026 Crash Course report documented record 23.1% total loss frequency for full-year 2025, with Copart’s management citing 24.2% for Q4 2025 specifically.

Why does this keep happening?

Modern cars are extraordinarily sensor-dense. Every bumper has radar. Every A-pillar has a camera. Every headlight assembly has adaptive motors and alignment sensors. CCC data shows that 28.3% of all repairable estimates in 2025 required at least one sensor calibration, up from 21.8% just a year prior. On insurance-company-approved repair estimates specifically, the calibration rate was 35.6%.

The math is simple: if your front bumper gets hit at 15 mph, the repair used to cost $1,200. Now it costs $2,800 because the radar module in that bumper needs recalibration, reprogramming, and verification. At some point, that repair cost exceeds the car’s value, and the carrier writes it off as a total loss. More complexity = higher repair costs = more total losses. And cars only get more complex.

The average US light vehicle was 12.8 years old in 2025. Older cars have lower actual cash values, meaning even modest repair estimates push them over the total-loss threshold.

Electric vehicles make this worse. EVs are sensor-heavy at the perimeter. Any damage that involves bumper-mounted sensors, battery integrity concerns, or charging systems can quickly make repair uneconomical. Jeff Liaw said on the Q4 2025 call: “They total, if anything, more easily.”

The crucial distinction: accident frequency has declined every year for 40+ years thanks to ADAS and safer road design. But total loss frequency has risen 5x over the same period. The total-loss trend has overwhelmed the accident-frequency trend every single year of Copart’s existence as a public company. Liaw’s long-term forecast:

“We’ll reach 25% and we’ll reach 30%.” The current reading is 24.2%. He’s not projecting something extraordinary, he’s extrapolating a 40-year trend.

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So Why Is the Stock Down 40%?

Two headwinds have arrived at the same time, and they’ve been brutal to the reported numbers.

Headwind 1: The underinsurance cycle

Auto insurance premiums rose 17% in 2024 and 7.6% in 2025 as carriers recovered from a brutal claims-inflation period. Consumers responded rationally: they dropped coverage.

The Insurance Research Council found that 33.4% of US drivers are either uninsured or underinsured. This is a 10-point increase since 2017. More starkly, earned car years (active collision policies) fell 4.1% YoY in Q2 2025, even as the actual vehicle fleet grew 1.4%.

That 5.5-point wedge between active policies and vehicles on the road is the underinsurance cycle. When a driver without collision coverage has an accident, the car doesn’t go to Copart, it ends up scrapped, retained, or sold privately. Copart’s US insurance unit volumes fell 9.5% in Q1 2026 and 10.7% in Q2 2026.

This is a cycle, not a structural shift.

Carrier profitability is now at a multi-decade peak. Progressive earned $11.3B in 2025. Allstate earned $10.2B. State Farm earned $12.9B (more than double the prior year) and announced a $5B policyholder dividend alongside rate cuts in 40 states averaging roughly 10%. When carriers cut prices, coverage becomes affordable again, earned car years recover, and salvage volume follows with a 6–12 month lag. We appear to be at the beginning of that cycle today.

Headwind 2: The Progressive/IAA volume shift

Progressive is the fastest-growing major US auto insurer of the past decade. It has been shifting a larger portion of its salvage volume to IAA (Copart’s competitor). Sell-side estimates suggest IAA’s share of Progressive’s salvage business moved from ~75% to ~90% during 2025. Since Progressive represents roughly 15% of the US auto insurance market, this shift amounts to an estimated 50,000–70,000 annualised unit headwind for Copart.

Management won’t say “Progressive” on earnings calls, careful not to escalate a dispute with a customer they presumably want back. But Liaw’s language in Q2 2026 earnings call gave it away: “We may be in a uniquely or unusually Copart adverse moment in time in that respect… but over the long haul we view those trends as often more cyclical than they are secular.”

The net result of both headwinds together: the headline numbers look terrible. Revenue down 3.6% in Q2 2026. EPS below consensus. Unit volumes down 8–10%. The stock has been punished.

The market is always forward looking, but the last 17 quarters have seen OK growth despite the recent headwind to unit volumes.

The Fundamentals

Despite the volume headwinds, the underlying financial quality has been remarkable.

Revenue, earnings and free cash flow per share since 2019:

Gross, operating and free cash flow margins remain robust, FCF margins have expanded significantly since 2023:

Return on invested capital is consistently above 25%, but the decline since 2022 is something investors should monitor over time:

The balance sheet is extraordinary:

• Cash: $5.1B

• Debt: effectively zero

• Total liquidity: $6.35B (including a new $1.25B undrawn revolver signed January 2026)

• Stockholders’ equity: $9.79B

This is one of the cleanest balance sheets in the S&P 500 for a company of this size.

Low debt levels create more room for flexibility and making good capital allocation decisions in down cycles. And the management team has proven its prudence for capital allocation in the past.

The Competitive Landscape

Copart operates in a genuine duopoly for US insurance salvage auctions. Its only real competitor is IAA, now owned by RB Global following a $7.3B acquisition that closed in March 2023.

That acquisition was messy. Leverage spiked to 3.0x. There was CEO turnover. Integration costs were significant. But RB Global has stabilised. Leverage is still high, but manageable (Although not something we would invest in):

Here’s where the valuation comparison gets interesting — and somewhat baffling:

• RB Global trades at a forward PE of 23.6x

• Copart trades at a forward PE of 20.8x

• RB Globals 5 year average ROIC is 7.1%

• Copart’s 5 year average ROIC is 31.6%

• RB Globals long term EPS growth estimate is 10%

• Copart’s long term EPS growth estimate is 15%

• RB Globals interest coverage is 4.1x (Not good)

• Copart’s interest coverage is infinite (No debt, no interest payments)

Cheaper valuation, higher return on invested capital, higher future growth estimates, and no debt compared to high debt levels…

In plain English: Copart is trading at a lower multiple than its more levered, lower-quality, lower growth competitor.

The only explanation is momentum. RBA is improving from a messy base. CPRT is declining from a pristine one. The market is paying for direction-of-change, not quality of business. That mispricing tends not to last.

Management: What The Buyback Actually Tells You

Jeff Liaw, who became sole CEO in April 2024, is worth paying close attention to. His earnings call language is intellectually rigorous, unusually specific, and direct about uncertainty in a way that most public-company management teams are not.

But what matters most right now isn’t what Liaw says, but what Copart does.

For nearly three full years (2023, 2024, 2025, and Q1 2026) Copart repurchased zero shares while cash built from $1.8B to $5.1B. The inaction looked strange for a company sitting on a mountain of cash.

Then, in under 90 days:

• November 2025 – January 2026: 5.48M shares repurchased for $218M at ~$39.82 average

• February 1 – March 2, 2026: 24.26M shares repurchased for $899M at ~$37.11 average

• Total: 29.7M shares, $1.12B deployed, at a blended average of $37.60

Liaw’s characterisation of the timing on the Q2 2026 call: “There’s no particular witchcraft or anything magical to it. I think it’s a function of what general valuation multiples are and where interest rates are, our own views of Copart’s relative valuation.”

No witchcraft. Just management deploying 22% of its entire cash balance to buy back stock at the cheapest valuation in a decade, after doing nothing for three years when the stock was at $50–$60.

This is exactly how great capital allocators behave. Copart did massive buybacks in 2011 (29% of shares outstanding) and 2016 (12% of shares outstanding):

Both times, the stock subsequently compounded dramatically.

Willis Johnson, the founder who still owns ~74 million shares worth ~$2.5B, built a culture of treating each dollar as precious, and buying back stock only when the math is clearly in shareholders’ favour.

The message from this buyback is unambiguous: management believes the stock at $34–38 is materially undervalued relative to their internal estimate of intrinsic value.

Valuation: Multi-Year Lows

At $33.87, here’s where Copart trades against its own history:

Copart currently trades at 21.22x forward PE, not seen since 2017:

Free cash flow yields are also trading at the highest since 2017:

This is a 30–35% discount to long-term averages. Copart last traded at these multiples in 2017. Before that, briefly during the 2008–2009 financial crisis. In 32 years as a public company, this is the deepest non-crisis multiple compression Copart has ever experienced.

The market is implying, through this multiple, that Copart will grow revenues at roughly 2.5–3.5% annually with flat margins. Given a business that has compounded at 10%+ every rolling three-year period since 2003, a 300,000-member global buyer network still expanding, and a structural total-loss-frequency trend that has beaten expectations every year, the market’s implied growth rate looks about half of what this business demonstrably delivers over time.

Three 18-month valuation scenarios:

Bull case $55–65:

Unit volumes inflect positive in Q3–Q4 2026 as carrier rate cuts restore coverage. Progressive allocation partially reverses. Buybacks reduce share count 7–10%. 2027 EPS of ~$2.10–2.20 at 28x = $58–62.

Base case $44–50

Modest volume recovery. Progressive shift stabilises. Margins hold at 41–42%. Buybacks provide EPS floor. 2027 EPS of ~$1.85–1.95 at 24–26x = $44–50.

Bear case $25–30

Progressive loss proves structural. Underinsurance persists. DOJ settlement costs $300–500M. Margins compress. 2027 EPS $1.50–1.65 at 18–20x = $26–30.

That is the short term scenarios, here are the three long-term scenarios for Copart:

• Long-term value estimate: $47.52

• Current price: $33.87

• Upside: +40.3%

• CAGR potential: +17.5%

The buyback math alone is meaningful

At a cumulative $2.5B deployed at ~$38, the share count falls roughly 6.7%. Applied to base-case 2027 EPS, post-buyback earnings per share would be approximately 7% higher than pre-buyback. That turns a flat-EPS year into a growth year and puts a hard floor under the stock.

Analyst consensus price targets range from $32 (Barclays, Underweight) to $62–65 (HSBC and CFRA, Buy/Strong Buy). Consensus sits around $44–48. Everyone agrees the stock is cheap relative to the business quality, the debate is purely about whether volumes recover.

What Could Go Wrong?

No breakdown is complete without an honest risk assessment.

The underinsurance cycle could be slower to reverse than expected. Carrier rate cuts in 40 states are happening now, but the lag from rate filing → policy in force → accident → salvage consignment is 6–12 months. If macro conditions worsen and drivers prioritise other expenses over reinstating coverage, the salvage pool recovery could be delayed by another 12–18 months.

The Progressive/IAA shift may be partly structural. IAA has genuinely improved its service metrics post-acquisition. Part of this volume shift likely reflects real carrier-level preference for two-vendor redundancy — not just IAA’s improved execution. It probably doesn’t fully reverse. We size the sustained headwind at 1.5–2.5% of Copart revenue over the next 24 months.

The DOJ investigation is an unresolved overhang. Since October 2023, Copart has disclosed a DOJ letter related to potential money-laundering control violations in its buyer-onboarding processes. As of March 2026, there’s no update beyond boilerplate. Based on comparable enforcement cases, we estimate a likely settlement in the tens-to-hundreds of millions. This is real but not balance-sheet-threatening. But “we don’t know” is the accurate answer.

Long-duration ADAS risk. Over a 20-year horizon, if autonomous vehicles genuinely achieve mainstream adoption, accident frequency could decline sharply enough to offset rising total-loss frequency. Liaw’s response to this on Q4 2025 was honest: “At this point, a de minimis effect.” The fleet-turnover math (16M new vehicles into 289M VIO) suggests this wouldn’t show up materially for decades even in a scenario where fully autonomous vehicles succeed. But it’s a real tail risk.

The Investment Case Summarized

Copart is a duopoly infrastructure business with 41.2% EBITDA margins, 31.6% ROIC, $5.1B of net cash, and a structural tailwind (rising total loss frequency) that has compounded for 40 straight years.

Today it trades at 20.8 forward PE, this is a 30% discount to its 10-year average and a discount to its lower-quality competitor (RB Global). Two cyclical headwinds (consumer underinsurance and one large carrier’s volume shift to IAA) are real, but most likely temporary.

The company’s management (with deep insider ownership and a 40-year track record of disciplined capital allocation) just put $1.12 billion of the company’s own money into buybacks at $37.60 after not buying a single share for three years.

The one question that matters: is the unit-volume weakness a cycle or a structural break? The 40-year total-loss-frequency trend, the all-time-high auction quality metrics (bidder count, pure sale rate, gross returns), and the insurance carrier profitability setup all say it’s a cycle.

At $33.87, you’re being offered one of the highest-quality business models in the US market at a price the company’s own management believes is cheap.

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Markets have been brutal lately, especially for quality investors. Tech has sold off. Software has completely collapsed. And a handful of businesses with real moats, cash flows and compounding opportunities, are trading at multi-year low levels.

That’s what we’re digging into today.

These are not businesses that are deteriorating, it is a list of quality names where the fundamentals are still intact, facing sentiment-driven price reductions. The valuation levels has reached levels where long-term investors are likely to be rewarded.

Let’s take a look at the 5 undervalued companies in question 👇

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1. 🧩 Topicus.com $TOI.V

Price: ~CAD $99.60 | Down ~48.8% since July 2025

The business

Topicus is the European arm of the Constellation Software empire. A serial acquirer of niche vertical market software businesses in the Netherlands and broader Europe.

It operates the same playbook as its parent: find small, mission-critical software companies with sticky recurring revenue, buy them at fair prices, never sell, and let the cash flows compound.

Constellation Software still owns 48% of shares outstanding, which tells you everything you need to know about who’s watching this closely.

Why it’s down

Two things have conspired against Topicus in the past year:

• A brutal sector-wide selloff in vertical market software driven by AI fears

• A period of slower organic growth.

The AI risk is real, to some extent. Yes, it is much easier to create the code for services that can replace many of Topicus’ VMS businesses. However, Topicus’ advantage is:

1. Deep relationships with organizations and government. The name of the game here is trust, reliability, and assurances. And Topicus has built a network of loyal customers that won’t trust anybody to process their data or to create workflows deeply embedded in the corporation.

2. Data, data, data. It’s all about the data, and Topicus has this in groves. It’s hard to create industry defining services without customer data to improve the product over time.

3. Switching costs are real. Software is often a really low cost for a corporation. If the migration is a hassle (Which it always is), a company will dread switching software unless they absolutely have to.

AI lowers the barrier to build. It does not lower the barrier to replace. A better product is not enough when the incumbent owns the workflow, the data, and the relationship.

Is Topicus a quality business?

Let’s first look at the growth in the most recent quarters:

• Revenue per share CAGR: +20.4%

• Free cash flow per share CAGR: 26.9%

• Book value per share CAGR: 21.7%

The business is growing rapidly ✅

Return on capital has consistently been in the 15-25% range since 2018:

Gross, operating, and free cash flow margins have been stable:

The company is in solid financial shape:

Valuation

Topicus is is trading at all time low valuation multiple levels.

Right now, the FCF yield is 7.61%, which is really high for a quality business.

Especially with the back drop that the business is not broken, but its cheap because the market doesn’t want to touch software right now.

High quality business, attractive valuation.

2. 🚗 Copart

Price: ~$33.36 | Down ~47.8% since May 2025

The business

Copart is the dominant global marketplace for salvage and used vehicles. It operates a two-sided platform connecting insurance companies (who need to dispose of totaled cars) with buyers (dismantlers, rebuilders, dealers, and exporters).

The business model is extraordinarily capital-efficient once yards are built: network effects, marketplace dynamics, and significant switching costs for insurers who have integrated Copart deeply into their claims workflow.

Why it’s down

Copart’s volumes at key insurance customers declined slightly as the number of uninsured drivers increased following several years of massive insurance premium inflation.

When premiums rise too fast, some drivers drop coverage. Fewer insured drivers means fewer total loss events, which means fewer cars flowing through the auction. Q2 FY2026 revenue fell 3.6% year-over-year to $1.12 billion, with EPS dropping from $0.41 to $0.36.

The market reacted harshly to a business it expects to compound consistently.

The numbers that matter

Copart’s growth has been impressive:

• Revenue per share CAGR: +12.9%

• Earnings per share CAGR: 19.1%

• Free cash flow per share CAGR: 27.4%

Although revenue have slowed down, free cash flow keeps compounding at attractive rates ✅

Copart’s return on capital is unmatched, usually staying well above 25%:

Margins are not only stable, but also expanding over time. This is a sign of a business with a sustainable competitive advantage.

Copart’s moat hasn’t moved an inch, and there is no sign of deterioration.

They have over 200 yards, their own auction technology, and are deeply embedded into the insurance industry claim process (It will take a long time to replicate).

Copart’s balance sheet remains flawless, with a $5.1 billion of net cash position.

While revenue growth has slowed in the last few years, earnings per share and free cash flow continue to grow at attractive rates.

Valuation verdict

At 21x forward earnings for a business with no debt, 34% net margins, $5.1 billion in cash, and a near-monopoly position in vehicle auctions, this is a genuinely attractive entry point.

If you subtract the $5.1 billion from the market cap, you get a forward PE of ~17x.

The FCF yield is also at a multi-year high of 4.79%, not seen since 2017:

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You have already made the most important decision.

You are not here asking whether you should invest. You are ready to get started.

Let’s make a few assumptions:

• You have ~$10,000 ready to put to work

• You are willing to add $1,000 every month until you get there.

The only question left is how to do it right.

Let us run the numbers first. Starting with $10,000 and adding $1,000 per month, you need roughly 15% annualised returns to hit $100,000 in around 5 years. That is a real number. Not guaranteed, but absolutely achievable with a disciplined process.

I know because I started my own stock portfolio in 2014 with less than $1000.

Here is exactly how I would approach it if I were starting today.

Step 1: Pick your investing style, learn it deeply, and set your criteria ✅

Before you buy a single share, you need to decide what kind of investor you are going to be. Not what sounds impressive at a dinner party (Like investing in the next big thing). What you will actually stick to when your portfolio is down 50% and every instinct tells you to do something.

There are three realistic options for an individual investor starting where you are.

Quality growth investing. You buy exceptional businesses with durable competitive advantages and high returns on capital, hold them for years, and let compounding do the work. This is my approach. It requires patience and the ability to sit through volatility without panicking.

The investing style has performed well over the long-term and have many psychological advantages that makes investing less stressful (I wrote a book on quality growth investing if you’re curious).

Index investing. You buy a low-cost ETF tracking the S&P 500 or MSCI World, add your $1,000 every month, and accept market returns. This beats most active investors over time. If you are not willing to put in genuine research hours every week, this is the right answer and there is no shame in that.

This strategy has been amazing over the past 10-20 years, but at the current valuation I have strong doubts that you will see the same returns from investing in an index fund as you have in most recent history.

A hybrid approach. You put 60-70% into a core index ETF and deploy the rest into your highest-conviction individual stock ideas. You get a safety net while building real stock-picking skills.

The worst outcome is mixing approaches reactively. Buying index ETFs when you are nervous, switching to individual stocks when you feel confident, and never developing real competence in either.

Pick one. Write down your strategy and allocation, and define your criteria in advance.

There are hundreds of other investing strategies that can work: value investing, micro cap investing, growth investing and so on. Pick what suits your temperament and curiosity the most.

Your buying criteria should answer:

• What kind of business qualifies?

• What financial characteristics must it have?

• What price is too high to pay regardless of quality?

Your selling criteria matter just as much. Write these down before you buy anything. Common and valid reasons to sell:

The original thesis has broken, a clearly better opportunity exists elsewhere, the position has grown so large it creates unacceptable risk, or you simply made a mistake and the business is not what you thought. Price going down is not a selling reason. The business getting worse is.

This is easy in theory, but hard in practice. I’ve had my fair share of mistakes from thesis drift in the past myself.

Having these written before the market turns volatile is what separates investors who build a system around their portfolio and compound over decades, and those who have an occasional good year with inconsistent returns.

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Get 30% off before the price hike, and start building a portfolio designed to outperform over the next decade.

Don’t overcomplicate it. Own better businesses. Let time do the work.

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Step 2: Learn to identify great businesses✅ (Dont start with valuation)

This is where most new investors go wrong. They open a stock screener, sort by P/E ratio, and ask “is this cheap?” That is the wrong first question.

Quality comes first. Valuation comes later.

A mediocre business at a cheap price is still a mediocre business. An exceptional business at a fair price can compound wealth for decades. The order matters enormously.

So what makes a business genuinely great?

There at Invest in Quality, we look at 6 pillars:

Honest, capable management.

Read five years of annual reports. Do they do what they said they would do? Are they candid about mistakes? Do they own meaningful amounts of stock? Are they buying back shares when the price is cheap or issuing new shares when the price is high? Actions reveal character far more reliably than words.

Here are 5 great founder-led businesses:

Business model

The best businesses don't need to constantly fight for every dollar of revenue. They've built models that are capital light. This means they can grow without endlessly reinvesting heavy amounts back into the business. They often collect recurring revenue from customers who come back year after year. When a business model is also hard to replicate, it becomes a source of durable competitive advantage in itself.

A sustainable competitive advantage.

Something structural that protects those returns from competition over time. The most durable moats are network effects (Mastercard becomes more valuable to cardholders every time a new merchant joins, and more valuable to merchants every time a new cardholder joins), switching costs (once a local government agency runs on one of Constellation Software’s VMS businesses, the cost and risk of switching is enormous and costly), cost advantages at scale, and intangible assets like brand or regulatory licences that take decades to build.

Growth

We’re not chasing hypergrowth stories that depend on a single product or a single market. We want growth that is steady, predictable, and diversified. The kind that shows up reliably in both good years and bad. Organic growth is especially valuable because it signals that customers genuinely want more of what the company offers, not that the business is buying growth through expensive acquisitions. A decade of clear runway ahead means the compounding has plenty of room to run.

Risk factors

Every business carries risk, but not all risks are equal. The businesses we want to own are non-cyclical, or at least less prone to the economic cycle (No business is completely non-cyclical).

These businesses are profitable even through tough periods, which means they don’t need external capital to survive a downturn. And crucially, they operate in industries where regulation is unlikely to suddenly change the rules of the game. We’re looking for businesses that sleep well at night, so you can too.

And, ultimately, we want to look at the valuation:

After all pillars check out, valuation becomes the final question. Notice that it’s the last question, not the first. We’re not looking for a bargain-bin price. We’re looking for a price that makes mathematical sense: one where even if our growth estimates are a little optimistic, the returns will still be solid. A quality business bought at a fair price beats a mediocre business bought at a cheap price almost every time, over the long run.

A simple starting filter:

• 5 year ROIC of +15%

• 5 year revenue growth of +10%

• Stable or expanding operating margin

The list will be short. Everything on it is worth understanding much more deeply.

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Step 3: Build a focused portfolio of high-conviction ideas that fit your style ✅

You do not need 30 stocks. You need 10 to 15 businesses you understand so well that you could explain each one without looking anything up. The moat, the growth drivers, the key risks, and why you still own it despite those risks.

With $10,000 to start, I would build positions in 5 to 7 businesses initially and expand toward 10 to 15 as your monthly contributions accumulate. Starting too diversified means your winners cannot meaningfully move the needle, and you never develop genuine depth of knowledge in anything you own.

Concentration is not recklessness. It is conviction. The investors who build serious wealth over time own fewer things, not more. Knowing what you own means you can hold through volatility instead of selling at the exact wrong moment.

A practical structure for your starting position: your top 3 ideas get the most capital, roughly 15-20% each. Your next 4-6 ideas get 5-10% each. Keep a small cash position of 5-10% to deploy when quality businesses go on sale, which they do regularly and for reasons that have nothing to do with the underlying business.

When your $1,000 monthly contribution arrives, direct it toward whichever position currently offers the best combination of conviction and value. Not necessarily the one that has fallen the most. The question is always: where does the next dollar work hardest?

One rule worth writing on a card and keeping at your desk: if you cannot write three paragraphs explaining why you own something without looking anything up, you do not know it well enough to own it. Owning things you do not understand means fear fills the gap that knowledge should occupy. You will sell at exactly the wrong time.

Step 4: Valuation. Is this the right time to buy? ✅

You have identified a great business. Now the question is: at what price does it become a good investment?

Even exceptional businesses can be poor investments if you overpay. A company growing earnings at 15% per year is still a disappointing investment if you paid a price that assumed 25% growth indefinitely. Valuation does not change the quality of the business. It determines the return you will earn from owning it.

My approach is a simple three-scenario framework. I model what I think the business looks like in 5 years under a bear case, a base case, and a bull case. For each scenario I estimate revenue, margins, and earnings. Then I work backwards: what price would I need to pay today to earn a 12-15% annualised return in my base case?

If the current price requires the bull case just to earn a fair return, I wait.

A few practical tools worth learning properly:

Free cash flow yield. Take the free cash flow per share and divide by the stock price. A FCF yield of 4-5% on a high-quality compounder growing at 12-15% is often attractive. A FCF yield of 1-2% on a slower grower usually is not.

Many investors like to compare the free cash flow yield with the risk free rate, which usually means the US 10 year treasury yield (Currently 4.285%). This is the yield you can get risk free. Is the investment worth it with all its inherent risks if you get a FCF yield below this level? That is the game.

Here is Novo Nordisk’s FCF yield, going from an unattractive range of ~1.5%, to 5.5%:

Price-to-earnings relative to growth (PEG ratio). Divide the P/E by the expected earnings growth rate. A PEG below 1 on a quality business is worth looking at seriously. Above 2 requires confidence in the growth trajectory and the sustained quality of the business (ROIC and margins holding up).

5 businesses with a PEG of <1 according to Fiscal.ai:

• Nvidia

• Taiwan Semiconductor

• Samsung Electronics $SSNL.F

• Eli Lilly

• Micron Technology

Owner’s earnings yield. Take net income, add back depreciation and amortisation, subtract the maintenance capital expenditure required to sustain the current business. Divide by market cap. This strips out accounting noise and tells you what the business actually earns for owners in cash terms. It is Buffett’s preferred measure and it is worth understanding.

The downside with owner’s earnings is that most companies don’t disclose what capital expenditure it needs to maintain the business, and what is for growth initiatives, so it has an element of subjectivity.

The goal is not to find the perfect entry point. The goal is to avoid paying prices that guarantee disappointment, and to act decisively when high-quality businesses go on sale.

So, to keep things simple:

A business with a FCF yield / Owner’s earnings yield above the risk free rate, and with a PEG close to 1 is very attractive.

Caveat: Many businesses with a PEG close to 1, will have a low FCF yield because it is in a growth phase, investing a lot in growth initiatives through CapEx. This suppresses FCF significantly.

Step 5: Create a real system for buying and selling ✅

The biggest destroyer of long-term returns is not picking the wrong stocks. It is making emotional decisions in the absence of a framework.

You need a written system. Before you deploy any capital, write down the answers to these questions for each position:

• Why am I buying this business?

• What would have to be true for this to be a +15% compounded annual growth rate return over 5 years?

• What are the three biggest risks to the thesis?

• What specific events or data points would cause me to sell?

• What is my maximum position size?

When the stock drops 25% in a month and it will, at some point, you do not have to make a decision under pressure. You return to the document and ask: has anything on this list changed? If nothing has changed, hold or add. If something has changed, reassess.

For buying: deploy capital in tranches, not all at once. When a business you want to own reaches a fair price, start a position with 1/3 or 1/4 of your intended allocation. If it continues to fall and the thesis remains intact, add the rest. This removes the paralysis of trying to time a perfect entry.

For selling: set a high bar. Selling because a stock has gone up a lot is one of the most expensive mistakes long-term investors make. The real compounding happens in the later years of ownership. Sell when the thesis breaks, when you find a clearly superior alternative, or when the position has grown so large it creates genuine risk for your overall financial situation.

For example, I sold my Apple position in 2018 because I felt the valuation was stretched:

For your $1,000 monthly contribution: make this decision analytically, not emotionally. Every month, look at your watchlist and your existing positions. Where is the highest-quality business trading at the most attractive price relative to what it is worth? That is where the new capital goes. Some months that is adding to an existing position. Some months it is starting a new one. The decision should always be rational.

Step 6: Track what matters. Build your investor dashboard ✅

Most investors track the wrong thing. They check their portfolio value every day, watch it move up and down, and make themselves anxious and reactive. The daily number is almost entirely noise.

What actually tells you whether you are succeeding is different.

What to track for your portfolio:

Your CAGR since inception, updated monthly. This is the number that tells you whether the strategy is working over time. Short-term performance is almost meaningless on its own.

But even CAGR over a few years can be misleading, it is far better to find a proxy for your portfolio that tells you more about how well the businesses are performing. A proxy that Warren Buffett used when he ran Berkshire was ‘look-through’ earnings. It is simple: The amount of shares you own of a stock multiplied with the earnings per share. Then you get a earnings proxy of what your portfolio is making. This should be tracked over the years to see if it is growing.

If look-through earnings is up 16% CAGR, but stock price is only up 10% CAGR, you can argue that the growth in earnings is more important for long-term returns.

What to track for each business:

This is where most investors stop short, and it is the most important part of the whole process. Build a simple Google Sheets tracker with one row per company. Update it after every quarterly earnings report. You are looking for trends, not perfection.

Here’s what I track:

• Revenue growth

• Earnings per share growth

• Free cash flow per share growth

• ROIC/ROCE/ROE

• Gross & operating margins

• Net debt to free cash flows

• Interest Coverage

• Change in shares oustanding

A business where revenue growth is slowing, margins are compressing, and ROIC is declining deserves serious scrutiny even if the stock price has not moved yet. The fundamentals lead the stock price, not the other way around.

The proxy that matters most: for each business you own, identify the one metric that is the clearest signal of whether the thesis is working. For a payments business like Mastercard, it is payment volume growth. For an industrial compounder like CSW Industrials, it is organic revenue growth and EBITDA margin trend. For a software business, it is net revenue retention. Know the proxy. When that number deteriorates, everything else deserves a second look.

What to ignore entirely: daily price movements, macro predictions, whether the market is expensive in aggregate, and what other investors are doing. None of these determine your long-term outcome. The quality of the businesses you own and the price you paid for them does.

How long will it actually take?

Let us run the real numbers on your situation. Starting with $10,000 and adding $1,000 every month.

We have 3 scenarios, index investing at 9%, investing in stocks with a 12% annual return, and Quality Growth investing with a 15% CAGR:

Now, the difference is not huge to get to your first $100k. With a 9% return it takes 5.5 years, 12% return it takes 5.1 years, and 15% it takes 4.7 years.

This is because what you invest every month at this point is more important than getting a few more percentages of return.

The interesting effect happens later in the compounding journey. Just look at the difference after 20 years:

• 8% CAGR: $727k

• 12% CAGR: $1.1M

• 15% CAGR: $1.69M

The real magic of compounding happens in the really long-term.

This is the difference after 30 years:

The first $100,000 is the hardest part. Every month your contributions represent a large share of the total. Once you get there, compounding starts doing more of the work than you do. The journey from $100,000 to $1,000,000 is where the real magic of long-term investing becomes visible.

Remember what Charlie Munger said:

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The honest truth about getting there

The checklist is simple. Following it is not.

March 2026 was a brutal month for my portfolio. Everything was down. Many of my holdings saw drops of more than 10%. Nearly every position faced selling pressure.

But I kept buying.

Not because I am reckless or indifferent to losses. Because I know what I own, I know why I owned it, and I know exactly what would actually make me sell a position. The prices told me the market was anxious. The businesses fundamentals told me nothing had changed except the markets emotional state.

This is the game of investing.

Build the system before you need it. Follow it when it is uncomfortable. Let compounding do the rest.

The $100,000 is not the destination. It is where the real ‘joys of compounding’ journey begins.

Ready to take the next step? Here’s how I can help you grow your investing journey:

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Today, we’re breaking down the 5 traits that separate 20% compounders from ‘good’ companies.

Most investors know the basics by now.

• High ROIC & ROIIC

• Long reinvestment runway

• Capital-light model

These are the entry requirements, the minimum spec for a quality growth business.

But they do not explain why some compounders deliver 12% annually and others deliver 20%.

The gap between good and exceptional is not ROIC. It is five things that are harder to see in a spreadsheet.

Let’s get into it 👇

Build a Market-Beating Portfolio of Quality Compounders, Now 30% Off

Many world-class compounders are currently trading at multi-year low levels. We do the work to identify the few that truly matter, businesses with durable moats, high returns on capital, and long reinvestment runways.

Inside the Premium service, you get:

• 💎 A focused portfolio of high-quality businesses

• 📈Clear buy & sell alerts

• 📚 Deep dives that actually explain why something works

• 📜 A repeatable framework you can use for life

Get 30% off before the price hike, and start building a portfolio designed to outperform over the next decade.

Don’t overcomplicate it. Own better businesses. Let time do the work.

Get 30% off forever

1. Pricing power that nobody talks about: the annual price letter

The companies that compound at 20% do not just have pricing power. They exercise it systematically, every single year, without losing customers.

Most businesses raise prices occasionally. The great compounders raise prices as a matter of policy. FICO charges mortgage lenders a fee every time they pull a credit score. That fee has gone from a few dollars to over $10 in recent years, with essentially no pushback, because there is no alternative. The product is mandated by the lending process. Customers do not like the increases. They pay them anyway:

Brunello Cucinelli does the same thing at the other end of the market. The company raises prices 8 to 10% every year on cashmere goods that sell to ultra-high-net-worth buyers.

The price increases do not suppress demand. In some cases they stimulate it, because the customer base associates higher prices with greater exclusivity. The brand is the moat. The annual price increase is how the moat earns.

What to look for: a business where customers complain about price increases in earnings calls, analyst reports, or customer reviews, and then renew anyway. That is the signal. Annoyance without churn is pricing power (Even better if you don’t hear anything, like for Brunello customers).

2. The niche monopoly in a market nobody else wants

The most durable compounders do not dominate large, glamorous markets. They dominate small, boring ones that nobody else bothered to enter.

Judges Scientific is a collection of 30 scientific instrument companies making products like vacuum gauges, cryogenic equipment, and electron microscopes. Each subsidiary is the market leader in its niche.

The niches are so small that a competitor entering one would face years of development cost to capture a market worth a few million pounds. The economics of competition do not work. So nobody competes. This has allowed Judges to compound its free cash flow per share by +15% annually over the last decade:

CSW Industrials makes products like HVAC dampers, plumbing solutions, and industrial sealants. Not exciting. But in the specific segments it occupies, it has dominant market share, 45% gross margins, and a customer base that has been buying from it for decades.

Switching costs are not contractual. They are practical. Nobody on a job site wants to re-specify a component that has worked fine for twenty years.

The result? +30.7% annual growth in free cash flow per share since 2014:

The pattern is the same across the best compounders: dominant position in a market too small to attract serious competition, with switching costs that make the dominant position self-reinforcing.

Rightmove has 80% of UK property listings. A competing portal would need to convince buyers and sellers to switch simultaneously. Neither will until the other does first. The niche locks in.

What to look for: operating margins that seem too high for the industry, combined with revenue that is almost entirely from repeat customers. That combination only exists when competition is structurally absent.

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3. The decentralised operator model as the actual moat

Some businesses have a moat because of what they sell. The best serial acquirers have a moat because of how they are organised.

Lifco has 275 subsidiaries across dental equipment, demolition tools, and document management.

The businesses have almost nothing in common except one thing: they are all run by the people who built them, with their own P&Ls, their own hiring decisions, and their own capital within defined limits.

Head office in Stockholm has fewer than 20 people. The subsidiaries do not feel like subsidiaries. They feel like owner-operated businesses, because they are.

This structure produces two advantages that do not show up in any single year’s numbers.

First, it retains entrepreneurial talent. Founders who sell to Lifco stay. They keep equity-like incentives and operational independence. The alternative is selling to a private equity firm and being managed to a budget. Lifco wins that decision most of the time.

Second, the model scales without diluting returns. Each new acquisition is independent. There is no integration cost, no cultural homogenisation, no bureaucratic drag. The 275th acquisition is as clean as the first.

Addtech, Diploma, and Kelly Partners Group run versions of the same model. REQ Capital’s research on Nordic serial acquirers found that decentralisation was one of the three primary drivers of their 19% 20-year CAGR, alongside capital allocation discipline and owner-operator culture.

What to look for: subsidiary managers who have been with the business for ten or more years after acquisition, low head office headcount relative to group revenue, and management commentary that describes acquired founders as partners rather than employees.

4. The capital allocator who gets better with age

In most industries, competitive advantage erodes over time. In programmatic acquisition, it compounds.

The best capital allocators, Mark Leonard at Constellation Software, Carl Bennet at Lifco, Brett Kelly at Kelly Partners, get measurably better at buying businesses as the years go on. They build proprietary deal flow. They develop pattern recognition for which businesses will integrate well and which will not. They build reputations in their target sectors as the preferred buyer, which means they see more deals at better prices than anyone else.

Constellation Software has acquired over 800 vertical market software businesses. The institutional knowledge from those 800 acquisitions, what to pay, what to fix, what to leave alone, is not replicable. A new entrant trying to compete in VMS acquisition starts with zero. Constellation starts with three decades of accumulated judgment. That gap widens every year.

The proof is in the pudding, just look at how Constellation stack up versus other serial acquirers. Usually, you see a correlation between how large the acquisition spend is, and the return the acquirer will get on their capital spent.

However, for Constellation, it has managed to keep a best in class ROIC + 1/2 organic growth rate despite its size.

This is what makes the ROIIC story so important for serial acquirers specifically. The question is not just what returns they earn on new capital today. It is whether the returns on new capital are stable or improving as the business matures. For the best operators, the answer is improving, or at least maintaining despite larger acquisition spending.

What to look for: acquisition multiples that have remained consistent over a decade despite a competitive deal market, suggesting proprietary sourcing rather than auction participation. Also: founders who reinvest proceeds into the acquirer’s stock after selling their business. That is the clearest possible signal of trust in the capital allocator.

5. The business that gets harder to kill every year

The final trait is the one that most distinguishes a 20% compounder from a 12% one over a full decade. The business becomes more defensible every year it operates.

This is different from a business that just survives. A company can have stable revenues for twenty years without becoming harder to displace. What the great compounders build is a system where every new customer, every new product, every new acquisition makes the existing base more valuable and the switching cost higher.

Mastercard is the clearest example at scale. Every merchant that accepts Mastercard increases the value of the network to every cardholder. Every cardholder that carries a Mastercard increases the value of acceptance to every merchant.

The network has been growing for sixty years and the flywheel has not slowed. Adding the 100 millionth merchant does not cost Mastercard anything. It makes the network worth more to everyone already on it.

Mastercard is one of the most consistant compounders with an annual free cash flow per share growth of 15.7% since 2013:

Topicus does this in European vertical market software. Each new VMS acquisition adds another sector to the platform. That makes Topicus a more credible acquirer for the next sector because it can demonstrate operational success in adjacent ones. The track record is the moat. The moat is built by the acquisitions. The acquisitions are made possible by the moat.

What to look for: net revenue retention above 100% in software businesses, meaning existing customers spend more each year without the company doing anything. In non-software businesses, look for revenue per customer that grows consistently year over year, not from upselling campaigns but from natural usage expansion.

Putting it together

The ROIC framework tells you whether a business is good. These five traits tell you whether it is exceptional.

• Pricing power that is exercised annually without churn

• A niche so small that competition is irrational

• A decentralised model that scales without losing what made it work

• A capital allocator whose judgment compounds alongside the business

• And a flywheel that gets harder to stop every year it runs

When you find all five, the valuation question almost takes care of itself. A business with a 20% earnings CAGR and these structural characteristics will look expensive every year and cheap in hindsight every decade. That is the nature of compounding. The market prices the next twelve months. You are buying the next ten to twenty years.

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That’s it for this time, let me know what you think in the comments below or by replying to this email!

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Disclaimer:

This newsletter is for informational purposes only and does not constitute financial, investment, or other professional advice. The views expressed are solely the author’s opinions and may change without notice.

Investing in securities involves risk, including the potential loss of capital. Past performance is not indicative of future results.

The author may hold positions in securities mentioned. Readers should do their own research and consult a licensed financial advisor before making investment decisions.

The QG portfolio focuses on owning high-quality businesses bought at attractive prices.

High quality means profitable growth, high and consistent returns on capital, reinvestment opportunities for excess capital, and strong margins that convert most earnings into cash.

Attractive prices mean we can expect roughly +12% annual return …

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Welcome to the March edition of Top 5 Buys ✅

In this article, we will discuss our top stock picks for March 2026.

Let’s get into it 👇

The Market Sentiment: Extreme Fear

March 2026 has been one of the most turbulent months in recent memory. The market is volatile as a result of:

• A US-Israeli military strike on Iran → sending oil prices surging above $100

• Trump’s 15% global tariff regime → with consumers and businesses absorbing most of the cost

• Inflation refusing to cooperate → PCE at 2.9%, the Fed stuck between a rock and a hard place

• A slowing economy → the weakest job growth outside of the pandemic since 2009

Investors are responding with extreme fear. The Fear & Greed Index currently sits at 21, deep in Extreme Fear territory.

The crazy part?

Despite elevated volatility drifting toward 19-20%, the S&P 500 year-to-date returns remain near flat, only down -1.63% YTD (Still close to all time high levels).

This is because the largest companies are holding up. Nvidia just unveiled its Vera Rubin platform at GTC 2026. Microsoft, Alphabet and the mega-caps are absorbing the uncertainty better than most.

Growth and SaaS stocks have not been so fortunate. The combination of tariff fears, geopolitical chaos and the agentic AI narrative continuing to pressure software multiples has hit many former darlings hard. The entire SaaS category is trading at its lowest forward EV/Sales in recent times:

Predicting the future is impossible. But we can point to 5 quality growth companies likely to keep compounding, regardless of tariffs, oil prices, or whatever headline drops next week.

Disclaimer:

The author may hold positions in securities mentioned. Readers should do their own research and consult a licensed financial advisor before making investment decisions.

Here are this month’s Top 5 👇

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1. Mastercard

The business model

Mastercard is a global payments network sitting between cardholders, banks, and merchants, processing transactions across more than 150 currencies in virtually every country on earth.

Critically, it takes on zero credit risk. It earns a small toll on every transaction that crosses its rails and moves on.

In the last twelve months, Mastercard generated $32.8 billion in revenue and nearly $15 billion in net profit, running a 60% operating margin and a 45% net margin.

The business model requires almost no capital to grow, with free cash flow of $17.2 billion against capex of just $489 million. With over 3 billion cards tied to a two-sided network connecting 25,000+ financial institutions, the competitive position is structural. The more issuers and merchants on the network, the more valuable it becomes for everyone else.

Growth drivers

The long-term thesis rests on one durable shift: the global migration of payments from cash to digital.

Most consumer transactions worldwide are still made in cash, particularly in emerging markets where Mastercard is actively expanding.

On top of that secular tailwind sit cross-border transactions, a high-margin segment that grows with international travel and e-commerce, and value-added services including fraud analytics, data insights, and cybersecurity.

All of these are growing faster than core and carry higher margins. Q4 2025 net revenue grew 15% to $8.8 billion, EPS grew 20%, and management guided for high-end low-double-digit currency-neutral growth in 2026.

The last 5 years of growth for Mastercard have been significant, growing revenue per share by 17.4%, EPS by 17.2%, and FCF per share by 20% CAGR with expanding Return on Invested Capital:

The buyback engine adds a further mechanical tailwind: Mastercard repurchased $3.6 billion of stock in Q4 alone, consistently compounding EPS ahead of revenue growth.

Valuation

Mastercard trades at a forward PE of around 25x, close to its 10 year low of 22.3x. The forward P/FCF is currently 24.5x, also well below its 10 year median multiple:

For a business compounding EPS in the high teens, a multiple of ~25x is arguably the most attractive entry point relative to its own history in years.

The analyst consensus target is $658, implying roughly 19% upside with a strong buy rating. The risk is macro, not structural. A slowdown in consumer spending or a regulatory intervention on interchange fees could temporarily compress volumes. For a long-duration compounder of this quality, the current price looks like a reasonable entry.

2. Lifco AB $LIFCO-B

The business model

Lifco is Sweden’s best-kept secret in quality investing. Built on the same decentralised serial acquirer model that made Constellation Software legendary, it owns 275 operating companies across 37 countries, organised into three divisions: Dental, Demolition & Tools, and Systems Solutions.

The primary business segment has compounded EBITDA by 8.2%, 17.5%, and 24.5% respectively, with organic growth ranging from -5.8% to +15.3% in the period:

The businesses Lifco owns are deliberately unglamorous: dental consumables, hydraulic demolition attachments, contract manufacturing.

That is precisely the point. Boring businesses in niche markets carry pricing power, low capital intensity, and minimal disruption risk. From 2015 to 2025, Lifco delivered an EBITDA CAGR of 18% and an EPS CAGR of 16%.

What drives growth from here

Acquisitions are the engine.

In 2025, Lifco completed 16 deals adding approximately SEK 2.2 billion in annualised net sales, while free cash flow per share has compounded at 18.2% annually since 2019.

The company targets founder-owned businesses in fragmented markets with few credible buyers, acquiring at sensible multiples and adding operational stability and efficiency.

The pipeline is structurally full. Thousands of private niche businesses across Europe and Globally will eventually need a buyer, and Lifco is patient, well-capitalised, and known as a permanent home.

Valuation

At roughly SEK127 billion market cap, Lifco trades at a premium to European industrial peers, warranted given the consistency of its compounding and the capital-light nature of its portfolio.

The stock has contracted by -33.8% since its July 2025 highs, offering a rare chance to enter a proven compounder at a forward PE of 28.1x or a fwd. FCF yield of 3.85%.

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Markets don’t often give you second chances on great businesses.

When they do, you don’t hesitate to act.

Over the past few weeks, volatility has picked up again. Some of the highest-quality companies in the world have quietly pulled back, not because the long-term story changed, but because short-term sentiment did.

That’s where the opportunity is.

Because if you’re trying to build a market-beating portfolio, the game isn’t about reacting to headlines.

It’s about owning:

• Businesses with durable competitive advantages

• High returns on capital

• Long reinvestment runways

• And management teams that actually know how to allocate capital

Those are the companies that compound for a decade.

Right now, one of these businesses has drifted into a range we simply don’t see very often.

Fundamentally, nothing is broken.

In fact, the fundamentals are arguably stronger than ever:

• Revenue growth is accelerating (+44.6% YoY)

• Customers continue to grow in numbers and spend

• Profits have exploded in recent time

• And the company is still early in penetrating a massive market

But the stock is down 37.6% from its all time highs.

And that disconnect is exactly what we, as long-term investors look for.

This is not a turnaround, this is a dominant platform business operating in one of the fastest growing markets globally with decades of compounding ahead.

The kind of business you want to own more of when it gets cheaper.

That’s exactly what I’ve done.

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Today we’re breaking down Uber Technologies 👇

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The Rise of Uber Technologies

For much of the past decade, Uber was widely viewed as the most controversial company in Silicon Valley. The business burned tens of billions of dollars, fought regulators around the world, and struggled to convince investors that its model could ever produce sustainable profits. Critics often reduced the company to a simple question:

That narrative has slowly started to change. Over the past several years, Uber has transitioned from a high-growth, cash-burning startup into a large-scale global marketplace that generates significant free cash flow. In 2025 the company produced over $9.7 billion in free cash flow as the platform continued to scale and improve its efficiency.

Today, the investment debate around Uber is very different than it was just a few years ago. The key question is no longer whether the company can survive. Instead, investors are beginning to ask whether Uber could become a durable long-term compounder built on a global logistics marketplace.

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Understanding What Uber Is

To understand the investment case, it helps to step back and think about what Uber actually does. On the surface, the company offers ride-hailing and food delivery services, but those products are only the visible layer of the business. Fundamentally, Uber is a platform that coordinates supply and demand across large transportation networks.

The platform connects three key groups: riders, drivers, and merchants. Through its marketplace algorithms, Uber continuously balances these groups by adjusting prices, optimizing routes, and matching supply with demand in real time. This system now operates across more than 70 countries and roughly 10,000 cities, making Uber one of the largest mobility platforms in the world.

The scale of the network is significant. In 2025, Uber had $193 billion in Gross Bookings across its platform and completed more than 13 billion trips annually. That level of transaction volume gives Uber a massive dataset on traffic patterns, rider behavior, delivery logistics, and urban mobility, which improves the efficiency of the marketplace over time.

A Platform Built Around Two Core Businesses

Uber’s business today revolves around two major segments: Mobility and Delivery. Mobility refers to the traditional ride-hailing service that connects riders and drivers, while Delivery includes food, grocery, and retail deliveries through Uber Eats. Both segments operate on the same underlying infrastructure, allowing Uber to leverage its driver network and logistics software across multiple services.

Mobility remains the company’s most profitable business. In 2025, Uber’s mobility segment generated an adjusted EBITDA of $7.9 billion, exceeding delivery’s adjusted EBITDA of $3.5 billion. This is largely because rides require less coordination than restaurant logistics and involve fewer middlemen. However, delivery has grown rapidly and now represents a massive marketplace in its own right, with tens of billions of dollars in annual bookings.

Uber also reports a smaller category called “All Other Adjusted EBITDA,” which includes businesses outside its core Mobility and Delivery segments. This category primarily contains Uber Freight, advertising, and newer platform initiatives that are still scaling. Because these businesses require ongoing investment, the segment has historically produced negative EBITDA. However, some of these initiatives could become meaningful profit contributors as Uber’s platform continues to mature.

The key strategic insight is that these businesses reinforce one another. Drivers can switch between delivering food and transporting passengers depending on demand conditions, which increases utilization and reduces idle time. At the same time, consumers who already have the Uber app installed are far more likely to use Uber Eats, lowering customer acquisition costs across the platform.

The Product Innovation That Created a Marketplace

From a product perspective, Uber’s breakthrough was incredibly simple. Before Uber existed, urban transportation systems were often fragmented and inefficient, with riders struggling to find available taxis and drivers wasting time waiting for passengers. Uber introduced a real-time marketplace that instantly matched drivers and riders through a smartphone app.

Three innovations were particularly important. First, the platform enabled riders to instantly discover available drivers, allowing riders to see nearby drivers in real time. Second, Uber introduced dynamic pricing, which adjusts fares based on demand and helps balance the marketplace during peak periods. Third, the company removed friction from payments by integrating automated billing directly into the app.

Together, these features created a transportation marketplace that was far more efficient than traditional taxi systems. Waiting times fell dramatically, driver utilization increased, and riders gained a predictable and transparent experience. These improvements helped Uber achieve global product-market fit remarkably quickly, turning the service into a daily habit for millions of users.

Why Marketplace Network Density Matters

The economics of Uber’s platform improve as the network becomes denser. In large cities with many riders and drivers, the system becomes significantly more efficient because the distance between supply and demand decreases. This reduces pickup times for riders and increases utilization rates for drivers.

Marketplace density also improves Uber’s margins. When drivers spend less time waiting for rides or deliveries, they can complete more trips per hour. That increases driver earnings without necessarily raising prices for consumers, which makes the platform more attractive to both sides of the marketplace.

This dynamic creates a powerful feedback loop. Faster pickup times attract more riders, which increases demand for drivers. More drivers then reduce wait times further, reinforcing the cycle. Over time, this type of network density advantage can become a meaningful competitive moat, and this effect is often referred to as “Uber’s Virtuous Cycle”:

The Transition to Profitability

For most of its early history, Uber prioritized growth over profitability. The company spent aggressively on driver incentives and rider discounts in order to build scale and outcompete regional rivals. While this strategy succeeded in establishing a global presence, it also resulted in significant financial losses.

The turning point came after Dara Khosrowshahi became CEO in 2017. Under his leadership, Uber shifted its focus toward operational discipline and sustainable profitability. The company exited several unprofitable markets, sold stakes in regional competitors like Didi and Grab, and began improving its unit economics across both mobility and delivery.

These changes gradually transformed the company’s financial profile. By 2023 and 2024, Uber had reached a point where operating leverage began to show clearly in the numbers. Revenue continued to grow, but costs grew more slowly, allowing free cash flow to expand meaningfully.

Advertising: A High-Margin Opportunity

One of the most interesting developments within Uber is the emergence of its advertising platform. Because millions of users open the Uber or Uber Eats app when they are ready to make a purchase, the platform captures extremely valuable commercial intent data. Restaurants and brands are increasingly willing to pay for placement within the app to capture that demand.

Uber’s advertising platform has grown remarkably quickly in just a few years. By May 2025, the business reached an annual revenue of $1.5 billion, growing roughly 60% YoY, making it one of the fastest-growing advertisement businesses globally. The rapid scaling reflects how valuable Uber’s ecosystem has become for brands looking to reach consumers at moments of real purchase intent.

Why Uber’s Data Is So Valuable

Uber’s biggest advantage in advertising comes from the data generated by its platform. The company facilitates more than 13.2 billion trips every year and serves over 180 million monthly users, creating a massive dataset about real-world consumer behavior.

Unlike many digital advertising platforms, Uber’s data reflects what people are actually doing in the physical world. The platform knows where users are traveling, what they are ordering, and when they are most likely to make purchases. That makes it possible for brands to place ads in highly relevant moments. For example promoting food offers during a commute home or travel products after a long flight.

New Ad Formats and What Comes Next

Uber is now expanding beyond simple sponsored listings into new ad formats. The company has installed around 50,000 tablets in vehicles, allowing brands to run video ads and content during rides.

Edwin Wong says these ads perform 11% than online video, in attention and post-checkout ad formats score 40%.

A study from Lumen found that Uber ads generate 6.6 times higher attention than online video, social, and mobile display.

Uber continues to expand these formats and build partnerships with platforms like OpenAI and OpenTable. Advertising could become one of the high-margin business segments inside the Uber ecosystem.

The Autonomous Vehicle Debate

Can you really write about Uber without mentioning autonomous driving?

Some investors believe that self-driving vehicles could eventually eliminate Uber’s role by replacing human drivers with robotaxi fleets. However, this view may underestimate the value of Uber’s marketplace and consumer habits.

Even in a world with autonomous vehicles, someone must coordinate the system. Riders still need a platform that handles pricing, routing, payments, and demand across cities. Uber already performs these functions at a massive scale, making it a natural coordination layer for autonomous fleets.

Autonomous technology is maturing, and Uber will likly transition from managing human drivers to managing fleets of self-driving vehicles.

Uber is already testing AV in Atlanta and Austin, and are seeing significant results compared to the top 20 cities in the US (Gray line).

The data Uber has collects suggest that AVs are getting ~30% more trips in per day (Huge utilization boost), and are ~25% faster (Happier customers).

Many are viewing AV as a threat to Uber’s business model, but the data suggests that AV advancements will make Uber I) grow faster, II) get better utilization from their drivers, and III) get happier customers due to more efficient rides.

Uber does not need AV to be a profitable business, but it can take it to the next level, making the already capital-light company drop it’s operational expenses even lower.

The AV market is set to grow at a CAGR of 34.5% to +$3 trillion in 2033. Uber is well-positioned to take a piece of that market.

Valuation: Is Uber undervalued?

Uber’s long-term valuation depends on two things:

• How fast the platform continues to grow

• How profitable the marketplace becomes as it scales

In a bear case, growth slows as ride-hailing and delivery mature and competition limits pricing power. Revenue grow ~5% annually, EBITDA margins stabilize around 15%, and free cash flow grows roughly 5% per year, which could justify a 12x FCF multiple in ten years.

In a base case, Uber keeps executing well across Mobility and Delivery while advertising becomes a meaningful profit driver. Revenue grows around 10–12% annually, EBITDA margins expand toward 25%, and free cash flow compounds at roughly 15–18% per year as operating leverage improves. In that scenario, a scaled but still growing platform could trade around 18–20x free cash flow.

The bull case assumes Uber fully leverages its global marketplace. Advertising becomes a large high-margin business, the network becomes more efficient, and new opportunities such as autonomous fleets or logistics expand the platform. Revenue could grow 15%+ annually, EBITDA margins approach 30%, and free cash flow compounds +20%+ per year, potentially supporting a 25x+ multiple for a highly cash-generative global platform.

The TTM free cash flow per share is $4.6, but if we exclude stock based compensation, we arrive at $3.84. I like to exclude SBC because it is a real cost for investors, as you get diluted over time.

The discounted cash flow analysis:

• Fair value estimate: $149,69

• Current share price: $73.35

• Upside: +104%

• Expected CAGR from base case: +20%

The large difference between our fair value estimate and the current share price tells us that the market is pricing in a lot of pessimism and risks.

Competition is one factor, AI is another, and many are looking at AVs as the bear case and risk factor for Uber.

For Uber to not provide a solid return over the next 5 to 10 years, the business must really fall apart, only growing its free cash flows at 4-6% annually, and trading at a 12x multiple.

In other words, the market is pricing in that Uber will get distrupted, most likely from automonous vehicles.

If you believe in the base or bull case for Uber, the valuation looks very attractive at its current levels.

The last few months of free cash flow growth has been stunning, and is coming from a significant increase in the net cash from operating activities, with a free cash flow conversion rate of >100%:

Risks Investors Should Consider

Despite its progress, Uber still faces several risks. Regulatory scrutiny remains one of the most important factors, particularly regarding the classification of drivers as independent contractors rather than employees. Changes in labor laws could increase operating costs in some markets.

Competition is another factor to watch, particularly in the food delivery segment. Companies such as DoorDash continue to compete aggressively for market share in the United States, while regional competitors remain strong in some international markets. These dynamics can pressure margins and limit pricing power.

Finally, the company’s demand is somewhat cyclical. Economic downturns can reduce discretionary spending on rides and restaurant delivery, which could temporarily slow growth. However, Uber’s global scale and diversified services help mitigate some of these risks.

The Long-Term Investment Question

Uber today is a fundamentally different company than it was five years ago. The platform has reached global scale, the marketplace economics are improving, and the business is generating significant free cash flow. This suggests that the company is maturing and settling in as a quality market leader.

At the same time, the long-term opportunity may still be larger than many investors realize. Urban mobility, food delivery, local commerce, and logistics represent enormous markets that continue to shift toward digital platforms. Uber’s position at the center of these ecosystems gives it a strong foundation for long-term growth.

The proven effectiveness of Uber’s advertisement business and its distribution and data makes it appealing as a possible growth driver in the coming years. Additionally, advancements in autonomous vehicles is more likely to be a growth driver and profit enhancer for Uber, than an existential threat.

Uber has done a fantastic job of expanding its network, improving its unit economics, and building new monetization layers like advertisiting. If the business continue to hold its position as a market leader, with the best distribution, data, and infrasctructure in mobility, the business may have far more compounding potential than the market once believed.

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Note: The price will increase 50% on April 1st.

Ready to take the next step? Here’s how I can help you grow your investing journey:

1. Go Premium — Unlock exclusive content and follow our market-beating Quality Growth portfolio. Learn more here.

2. Essentials of Quality Growth — Join over 300 investors who have built winning portfolios with this step-by-step guide to identifying top-quality compounders. Get the guide.

3. Free Valuation Cheat Sheet — Discover a simple, reliable way to value businesses and set your margin of safety. Download now.

4. Free Guide: How to Identify a Compounder — Learn the key traits of companies worth holding for the long term. Access it here.

5. Free Guide: How to Analyze Financial Statements — Master reading balance sheets, income statements, and cash flows. Start learning.

6. Get Featured — Promote yourself to over 24,000 active stock market investors with a 45% open rate. Reach out: investinassets20@gmail.com

The QG portfolio focuses on owning high-quality businesses bought at attractive prices.

High quality means profitable growth, high and consistent returns on capital, reinvestment opportunities for excess capital, and strong margins that convert most earnings into cash.

Attractive prices mean we can expect roughly +12% annual retu…

Read more

In this article, we’ll discuss a recent interview with Terry Smith, the legendary investor behind Fundsmith.

Smith has beaten the index for decades, but he has faced headwinds in recent years, as Quality investing is experiencing its worst period since the dot-com bubble.

Fundsmith has delivered an annual return of 13.6% since its inception in 2010, compared to 12.1% for the MSCI World Index.

However, the fund has underperformed the index for several years now. In the interview, Smith emphasizes the importance of patience and long-term thinking.

If you’d like to watch the full interview, you can find it here:

Let’s go through the key points 👇

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FCF Yield + Growth = Long-Term Compounding

Smith argues that one of the simplest ways to estimate a company’s future shareholder return is to take its free cash flow yield and add the expected growth rate.

For example, Visa has an FCF yield of around 4% and an estimated future EPS growth rate of 12.9%. Based on Smith’s framework, this would imply a potential long-term return of approximately 16.9%.

Smith doesn’t elaborate in detail on why he prefers free cash flow, but other investors often use earnings yield (the inverse of the P/E ratio) plus dividend yield and growth estimates. That approach can also work.

However, Smith always follows the cash.

He focuses on a company’s ability to convert accounting earnings into real cash, and he is mindful of the accounting techniques that can distort reported earnings.

Free cash flow is harder to manipulate. It is calculated as cash flow from operations (CFFO) minus capital expenditures (CapEx). The logic is simple: operating cash flow reflects the true cash generation of the business, while CapEx represents the capital required to sustain operations.

In many cases, CapEx can be divided into maintenance and growth investments. Some investors attempt to adjust for this by excluding “growth CapEx,” but Smith prefers to keep the calculation straightforward. Growth investments are typically already reflected in the company’s expected growth rate.

FCF yield plus expected future growth provides a practical and effective way to think about long-term returns.

The Man in the Arena

Terry Smith is clearly inspired by Theodore Roosevelt’s famous “Man in the Arena” speech.

He often references it when discussing his success.

Smith speaks about courage — about making decisions that may expose you to ridicule or public criticism. For example, Smith recently thought about buying a bank stock after being opposed to banks for decades.

He refuses to let fear of embarrassment prevent him from making what he believes is the right decision.

Like Roosevelt’s “man in the arena,” he would rather risk failure than stand among the timid souls who experience neither victory nor defeat.

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The Insanity of the Current Market

Smith describes today’s market environment as unusual.

He argues that AI expectations are currently carrying the market. Strip away AI-related spending, and the broader economic picture looks far less impressive.

This concerns him. No one truly knows what AI will deliver in terms of profits and cash flows over the next five years. When the hype fades, will sustainable business models justify the enormous investments being made?

Smith does not give a definitive answer, but reading between the lines, he appears skeptical.

He also highlights a major structural shift over the past decade: the rise of index investing.

Today, if an investor allocates $100 to an S&P 500 fund, approximately $7–8 flows to Nvidia, and $4–6 goes to many of the other Magnificent Seven companies.

Smith argues that this creates a supply-demand distortion:

Stocks rise → index weight increases → more passive inflows → prices rise further → weights increase again.

This feedback loop reinforces momentum.

Almost every major index fund has significant exposure to these same large companies. In that sense, index investing can amplify concentration risk. Even the MSCI world index, which is supposed to be globally diversified, is highly concentrated in the top 10 US stocks:

According to Smith, the top 10 stocks have driven roughly two-thirds of recent market gains. This explains why buying the index has worked so well — it is heavily concentrated in these mega-cap leaders.

Smith does not claim to know when this dynamic will reverse. However, he notes that we have not experienced a true recession since Iraq invaded Kuwait in the early 1990s, and that the only major firm to collapse in 2008 was Lehman Brothers.

He believes we may be due for a significant correction, though he admits he has no insight into when that might occur.

Why Smith Believes His Portfolio Will Perform Well

Smith argues that his portfolio consists of companies with:

• Predictable future cash flows (driven by moats and organic growth)

• Returns on capital of approximately 30%

• Strong conversion of earnings into free cash flow

He believes that owning businesses with these characteristics will ultimately produce strong results.

However, patience is essential — particularly during periods dominated by powerful market narratives.

Smith echoes a principle associated with Charlie Munger: over long time horizons, shareholder returns tend to approximate the company’s return on capital.

Charlie argues that it is hard for a business with a return on capital of 6% to earn any more than 6% for shareholders over the long term. Here is the full quote from Charlie:

Concluding Reflections

It is striking how quickly perception shifts.

Terry Smith has gone from being celebrated as a superstar investor to being dismissed by some as outdated — all within a few years.

Markets have short memories. Long-term track records are easily forgotten when recent performance disappoints.

Fundsmith has not abandoned its philosophy. It has adapted where necessary but remains committed to its core principles.

Meanwhile, many investors have shifted toward the Magnificent Seven — and that strategy has worked extremely well. So the temptation is understandable.

Still, there are risks in today’s index-driven market. When valuations are stretched, and optimism fuels unprecedented capital investment, it may be wise to step back and reassess.

Buffett faced similar criticism during the dot-com era.

The worst strategy an investor can adopt is constantly changing approaches to match current market leadership. Every year brings new narratives, sectors, and technologies.

The disciplined investor builds a portfolio of high-quality businesses they genuinely want to own — and remains patient enough to let compounding work.

It has been a challenging period for many quality-focused investors.

But disciplined investing, with a strong emphasis on risk-adjusted returns, will never go out of style.

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I run a concentrated portfolio. This means that in good times, I outperform significantly, but in bad times, I underperform.

If a large position goes against me, it impacts the portfolio returns a lot. Even if the business returns are stellar.

I don’t like to trade frequently. I love to let my winners run, and I do most of the time. But the…

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Welcome to the Feburary edition of Top 5 Buys ✅

In this article, we will discuss our top stock picks for February 2026.

Let’s get into it 👇

The Market Sentiment: Fear 😨

The market is volatile as a result of:

• Interest rates being “Higher for longer”

• Mega-CapEx budgets (Way higher than expectations)

• A changing world order and global politics

Investors answer this uncertainty with fear — pulling money out of the market.

After a brief optimistic second half of 2025, the trend is now negative:

The crazy part? Despite massive fear and uncertainty — the S&P 500 is still close to all time highs:

This is simply because many of the largest companies in the S&P 500 have held up very well, think Nvidia, Alphabet, and Apple.

“SaaS” companies have not been that fortunate, after the narrative shock we’ve seen with the ‘agentic AI’ wave, many former darlings are struggling big time:

Fast growing strong businesses like Crowdstrike and Axon are down -37.4% and -51.2% respectively. And community darlings like Topicus is down -54.6% from its all time highs.

Predicting the future is impossible, but we can point to 5 quality growth companies that are likey to continue compounding despite the prevailing narrative being that AI will eat Software-as-a-Service for lunch.

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Here are this month’s Top 5 👇

#1 Microsoft

Microsoft is not a “SaaS”-business, it is a infrastructure business.

Azure isn’t a project management tool you cancel in a downturn. It’s where the workloads live. And workloads don’t leave easily.

Across Windows, Office, security, developer tools, and cloud, Microsoft is deeply embedded into the operating system of global business. The switching costs at scale are enormous. From a technical, financial, and political perspective inside organizations.

Copilot inside Microsoft 365 is a way for Microsoft to improve the product, monitization and stickyness of the product for hundreds of millions of users.

The business of Microsoft has:

• Massive cash flows (Free cash flow is somewhat restricted due to high CapEx spend)

• Pristine balance sheet

• Bundling powerful tools and products across the entire tech stack

When budgets tighten, vendors consolidate. And consolidation favors platforms. And who is the king of enterprise platforms? You guessed it, Microsoft.

And it’s not like Microsoft is showing weakness in its fundamentals.

• Productivity was up +16% YoY

• Intelligent Cloud was up +29% YoY

• Diluted earnings per share was up +60%

In the most recent quarter:

The fact of the matter is that Microsoft is a pristine quality business, growing at unheard of levels for its size, now trading at 21.9x forward earnings:

The last time Microsoft was trading at this level was in the 2022 sell off — a great time to add shares.

Microsoft has a free cash flow yield of 2.2% + 14.3% expected long term growth.

FCF yield of 2.2% + 14.3% growth = 16.5%

#2 Amazon

When SaaS sells off, anything cloud-related gets dragged down with it.

But AWS is not optional software, it is the infrastructure where modern digital businesses are built.

When customers cut costs, they may reduce usage, but they don’t rip out AWS. The workloads stay. That distinction matters.

All the focus is on AWS; the rest of Amazon is chronically mispriced.

Retail margins expand meaningfully when cost discipline improves. We’ve already seen what happens when fulfillment efficiency tightens and overcapacity normalizes.

Amazon’s advertisement business is a high-margin machine integrated directly into purchase intent. A structural advantage for Amazon that is part of their flywheel.

And ultimately, Amazon’s optionality allows it to reinvest across logistics, AI, devices, healthcare, and Prime. Few companies in the world have that capital allocation flexibility.

Free cash flow always looks weak at the peak of capex cycles. And then it inflects when investment moderates.

Add AI to the equation:

AI workloads don’t replace cloud infrastructure. They increase the demand for it. And AWS remains one of the foundational platforms.

The acceleration in top-line growth is a sign that this is happening:

Despite the reaccelleration of AWS and other business segments, Amazon continues to trade at attractive rates.

Looking at price to operating cash flow because free cash flows are temporarily depressed due to a large CapEx investment cycle, and earnings not providing a realistic picture of earnings capacity:

Amazon has an earnings yield of 3.5% + 17.3% expected long term growth.

Earnings yield of 3.5% + 17.3% = 20.8%

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