Four Things To Look for in a Stock

During their recent episode, Taylor, Carlisle, and Chris Mayer discussed The Four Things Chris Mayer Looks for in a Stock. Here’s an excerpt from the episode:

[Chris] Yeah. So I’m certainly not willing to compromise on the people, character of the people. I mean, I’m not known to get involved in anything where I think, you know, they’re bad capital allocators or there’s any question of their integrity or, you know, taking advantage of minority shareholders or stuff like that.

So steer clear of that. For me also, you know, the return on capital is important, but that can also be something where, you know, if it’s, if it’s something that is getting better. So there’s like a look through, you know, you kind of look forward a little bit.

It doesn’t necessarily have to be something that’s earning high returns right now, could be, you know, decent returns now. And then there’s some underlying scale or some other parts of the business that are going to improve over time. They’re pretty reliable.

So that, and then for me, yeah, I mean, I’m always scared of like dealing with high leverage balance sheets because I’ve, you know, I’ve been burned by that in the past. And I can remember even like during the 08 crisis, even if you had something that an okay balance sheet became problematic in a short amount of time. So I just prefer to just, you know, sleep well at night and have great balance sheets.

And when things get crazy, then I know my companies will be fine and maybe have the ability to take advantage and do something during those distress periods. So I would say those are kind of the big three for me. You know, I know I haven’t mentioned valuation yet.

[Jake] Where’s the compromise?

[Chris] Yeah. So, you know, obviously everything you run through, I run through some sort of analysis where I’m looking at what kind of IRR I expect and that’s got to make sense as well. So I think all four of those things are pretty good, pretty good little stool, if you will.

[Jake] How far out are you typically looking?

[Chris] Like five to 10. Okay. Yeah.

You know, five is not that long, but it’s long enough. I mean, you know, if something works pretty well in five, and then it looks even better over 10. But you got to be careful because obviously we all play around with numbers and you can make something look really good over 10 years.

And whatever you want to say, whatever you want to say, you can say, so you’d be careful about that kind of stuff. And what kind of multiples you assume. But yeah, I’d say kind of five to 10 is what I’m looking at.

[Jake] Where does culture play over and above just management?

[Chris] Yeah, that’s huge for me. And, you know, I write about that in the book too, different ways you can look at culture. For a long-term investor, I think that’s really important.

You know, if you’re holding a stock for a year or two or three, who cares? You know, culture may not matter so much, but over the long-term. So what does that mean, culture, really?

It’s like, you know, it’s a hard term to define. It sort of involves the way a business does business, the way it treats people, the way it treats its employees. So you can look at things like employee tenure.

You can look at things like are the employee shareholders as well? You have some culture of ownership there. How do they treat their suppliers and their other corporate relationships?

And so there’s good studies that show that long-lasting companies also have long-lasting relationships with their suppliers. So it’s kind of like an ecosystem, you know? That could be another sign of good culture.

So yeah, a team that promotes from within has a lot of executives that have been around, worked their way up the business. That can be an indication of good culture, too. So we have all these little markers and you just have to sort of dig to find them out.

It’s not that easy. But I think over the long period of time that those things can really matter.

[Tobias] Is that the single sort of uniting trait beyond return on invested capital and other things like that culture?

[Chris] For me, I think it would be. Yeah, I think it’s important for me. You know, with all these things that we talk about investing, there’s exceptions to everything.

But as a general, I love to kind of get into the culture of the business and what’s it like to work there?

[Jake] How do you figure that out from the outside?

[Chris] It’s very difficult. Yeah.

[Jake] That’s what I mean. Put on a hat and sunglasses and apply for a job.

[Chris] Yeah, you really can’t. That’s what I mean. You have these little clues, little markers that we can look for.

But I make use of the expert networks and talk to people who work there and you can get some sense of that. But even that you have to be sort of careful because those people don’t work there anymore. And sometimes there’s a reason.

[Jake] Yeah. If the culture rejected them, then that’s that might be actually the inverse signal.

[Chris] The same thing when people go and look at Glassdoor and they see bad reviews or something, but they could just be disgruntled employees, very small sample size. So yeah, to your point, I mean, it’s very difficult to know for sure. You just have little clues and markers that we can look for and pay attention for.

Obvious red flags and I don’t know what those would be like. Lawsuits, workplace lawsuits and bad behaviour in certain ways that manifests itself that we can see it. But otherwise, yeah, hard to detect, but nice to have.