I added to our holdings in Marcus & Millichap (MMI) during the quarter. MMI is a commercial real estate brokerage firm that has been in business almost fifty years. Their durability is a testament to a capital-light/variable cost business model, a conservative balance sheet and the high value proposition it offers its customers.

The business went public in 2013 and rose sharply through mid-2015 to a very rich valuation. Since then, the stock has sold off sharply despite solid operating performance as investors have grown concerned about the pending end of the current real estate cycle.

My thesis is straightforward. This is a business that throws off tremendous amounts of excess cash flow, has net cash on the balance sheet and its main costs are sales commissions that naturally scale down with revenue declines. At the current valuation, MMI is priced as if a recession is imminent. If the consensus is right, we should earn a reasonable rate of return on our investment. If a recession is not imminent – and I have substantial reason to believe this to be most probable – then we should capture excess returns.

MMI embodies what I strive to uncover for the portfolio: situations where uncertainty is high, but real risk – permanent capital impairment – is low.

I was honored to present my thesis on MMI at the Wide-Moat Investing Summit 2016.

This post has been excerpted from a letter of Aquitania Capital Management.