Fund managers tend to say they look for quality companies that are increasing sales and cash flow, and have strong balance sheets.
Bryan Hinmon, the lead manager of the Motley Fool Global Opportunities Fund, says another measure is just as important: Companies whose founders or CEOs remain heavily involved and have large ownership stakes.
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In an interview July 17, Hinmon said that rather than measuring “statistical quality,” he and his colleagues emphasize these four areas when selecting companies:
- Management culture and incentives.
- The economics of the business.
- Competitive advantages.
- The duration of growth.
Two themes Hinmon focuses on are “incredible leadership cultures” and the potential for companies to reinvest for growth in expanding markets.
Amazon
It’s obvious that Amazon.com AMZN, -1.63%[2] founder and CEO Jeff Bezos has plenty of motivation to continue pushing the internet retail pioneer into an expanding array of markets — he holds 16% of the company’s shares.
Amazon is the largest holding of the Motley Fool Global Opportunities Fund.
Year after year, Amazon’s shares have traded at valuations above 100 times consensus forward earnings estimates. An obvious question asked by investors — including those who have shied away from Amazon and missed tremendous gains — is how long the stock can fly this high when profit margins for most retail business are low.
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Amazon’s management is “fully aware that the market is giving them license to make a massive amount of reinvestment and show little profitability,” Hinmon said. He believes sustained and significant profits “will materialize” eventually, and that Amazon’s history of reducing investment when investors question its business model to “give a glimpse of the potential profitability of the business” prove Bezos and his team understand this potential problem.
Meanwhile, the rapid growth of Amazon Web Services (first-quarter sales were up 43% and operating profit was up 92% from a year earlier), “the power of consumer habits,” the popularity of Amazon Prime and the company’s ability to compete on price and quick, reliable delivery help Hinmon to remain confident in Amazon as a long-term investment.