In a July afternoon, GuruFocus sat down with top Guru investor
Don Yacktman for more than an hour and asked him questions about
his investing strategy and philosophy. This is one of the
questions we asked:
You wrote before, I think a year ago, that you want to
invest in high quality companies, you said high quality companies
were relatively cheaper at this time. What's your definition of a
high quality company?
"I would make it a function of high return on asset businesses.
In other words, the businesses that have the sustainability to
earn high returns on assets, I think they are the high quality
businesses. And if you were to take your piece of paper and use
two axis, one would be fixed assets, the other economic
sensitivity, you could plot any company on there. The companies
that have low capital intensity and low cyclicality like Coke (
) or Pepsi (
), you can go on and on, Proctor & Gamble (
) certainly, those businesses have the ability to earn some of
the highest returns out there. What you're looking for is not
only both the low asset requirements and low cyclicality but in
addition to that, and that usually means a disposable type
product or service, it also means you have a large market share.
Proctor & Gamble, while struggling in the short term, no
question about it, it's disappointed people and they haven't been
able to get gross margins up, they're various reasons for that.
But I think the reality is when you have 50% of the detergent
market in the U.S., somebody else can't take it from you. You can
blow it, but they can't take it from you. And what happens is
when you have those market shares, 40% market share versus 20%
market share, you don't earn twice as much, you earn 4 times as
much. Because what happens is your cost structure gets to be
lower and lower, relative to your competition. And you can spread
your costs across more units.
And that's why if you're going to be a great international
company for the next 20, 30, 40, 50, years, I think you're going
to have to have exposure in both the U.S., because 20-25% of the
world GDP is there, and you're going to need that to get the
volume, then you want to expand those entities that you're making
into particular areas, like China or India, because you get the
volume growth, and that will enhance your strength.
It's a matter of getting it all together in the right format, and
some companies are probably ahead of other companies in doing it,
but you look a few years ago, Kraft (
) had to buy Cadbury and Irene (Rosenfeld, Kraft CEO) had to make
that decision, it was a very expensive decision, and I don't
think she handled it the best way. But she knew she had to get
that international exposure, get a huge international exposure as
a distribution channel to start moving things through it, and she
had a lot of lagging low growth businesses. We put Kraft next to
Pepsi for instance, and here you've got Pepsi with snack foods,
what would you rather have, Frito Lay or Nabisco if you've looked
at an aisle in the grocery store, look at the Frito Lay aisle
compared to the cooking aisle, what would you rather have,
Maxwell house coffee and crystal light, or would you rather have
the carbonated beverages, Tropicana and Gatorade. Why would you
not want to own Pepsi versus Kraft? In the short term Pepsi
hasn't executed itself well in certain areas, but again in the
short term, look at Coke. In the past 15 years Coke went from 89
to below 40, back to the mid-70s. It's a matter of when you
bought it. It's the same company, yes there were periods of time
when it didn't execute very well, and they're doing better now,
but the big decision was when you bought it. We bought ours in
the low 40s, and we did very very well."
With that we used our
to screen the companies with the highest ROA in Yackman's
portfolio. Here is what we got:
||Philip Morris International Inc.
||The TJX Companies, Inc.
||Apollo Group Inc
||C.R. Bard, Inc.
||Lancaster Colony Corp.
The entire interview will be published soon. In the interview Mr.
Yacktman also discussed the best times to buy stocks and his view
on value traps. Stay tuned.
In the meantime, check out the cheapest stocks in Don Yacktman's
portfolio.About GuruFocus: GuruFocus.com tracks the stocks picks
and portfolio holdings of the world's best investors. This value
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