By broadening the possibilities for capital allocation, we increase the chances of finding good investments with a low probability of capital loss, which in itself is powerfully valuable in order to improve long-term returns.
We first learned of Equinix years ago and dismissed the stock as merely another data center marketing itself for having recurring revenue while the primary asset depreciated rapidly and required constant replenishment.
Time will tell if people are indeed overestimating the stability of valuation multiples and cash flows, but we recently read a couple of interesting thought pieces that indicate our general sense of caution is warranted.
Asset-Based Investing in an Earnings-Focused World
Our estimates of intrinsic value do not heavily weigh forecasts of cash flows years into the future, simply because the future is inherently difficult to predict. We are not willing to “pay up” for businesses.
One of the biggest mistakes we made in 2017 was under-allocating to Shopify, Alibaba, and Arista. We knew they were bargains due to their growth prospects but were just not ready to pay high multiples.
We are constantly refining our investment criteria, so we can more easily filter and process opportunities. Our criteria help us eliminate many ideas and prioritize the opportunities we should be researching.
There is strong demand for software development, but relatively few people who can develop software. Appian’s platform can accelerate developers’ speed by up to 20x, producing custom software in far less time.
Aimia: A Low-Ball Bid, Cash and NOLs, and Capable Capital Allocators
Aimia is a collection of assets in the loyalty space, which I became familiar with last year when researching Points.com (PCOM). Aimia’s main asset is Air Canada’s frequent flyer program, known as Aeroplan.
Hill International: Activists, Forced Selling, and Low-Hanging Fruit
Hill International provides asset light construction management and consulting services, with 47% of 2017 revenue from the U.S., 35% from the Middle East, and the balance from EMEA, LatAm, APAC, and Africa.
EZCorp: Mr. Market Shortsighted in Convert Issuance-related Selloff
EZCorp continues to frustrate following the May 2018 issuance of convertible debt. To be clear there are other things not to like here, but as far as the sell off following the convert, the market is being shortsighted.