“We don’t just invest in companies—we invest in quality.”
It’s a common refrain, but what does it mean exactly?
For many investors, quality is defined and measured by a company’s return on equity, earnings growth, debt-to-equity ratio, profit margins, cash flow, and dividend payout. All are important metrics, but we believe quality can’t be determined by numbers alone.
Painting a complete picture of a company’s potential requires deeper analysis of both quantitative and qualitative factors.
It involves digging into a company’s fundamentals, understanding management’s strategy, and spotting sustainable advantages.
Read on to discover the lengths we go to assess the quality of a company, and for an example of our research approach in action.
Finding quality companies isn’t easy, and it certainly doesn’t happen overnight. We rely on a detailed, bottom-up research process that involves getting to know a company from all angles.
Our investment team regularly attends investment conferences, trade shows, and company-hosted events to stay close to the action. We don’t just listen to what management says in earnings calls—we meet with them face-to-face, talk with their customers, suppliers, and tour facilities to get a sense of how they operate.
We also dive deep into the competitive landscape. Are the industries they operate in growing? Do they have an edge over their competitors? What’s the barrier to entry in their market? These are the kinds of questions we ask to ensure we’re investing in companies that are well-positioned for long-term success.
Once we’ve done the hard work of evaluating a company’s position within its industry, we narrow our focus to a smaller list of companies—usually about 35 to 45 high-quality names—that we believe have the best prospects for growth and resilience.
For a sense of how this process works, let’s walk through an example: freight transportation company XPO.
When we first started researching XPO in late 2022, it was a transportation conglomerate with a lot of moving parts. The company had several business segments, and it wasn’t immediately clear where the real value lay. But after several conversations with management and further analysis, we determined XPO’s less-than-truckload (LTL) transportation business—a segment that offers high barriers to entry and sustainable competitive advantages—was where the opportunity was hiding.
LTL transportation, which involves moving freight in smaller shipments that don’t fill up an entire truck, is a capital-intensive business. To succeed, companies need trucks, trailers, terminals, and labor—and those elements don’t come cheap.
This niche within the transportation industry is also dominated by a handful of players, with just 10 companies controlling more than 75% of the market, which fosters rational pricing and ensures stability even during times of economic uncertainty. These market dynamics create a unique backdrop for companies operating in the space, as pricing can be adjusted to reflect inflationary pressures or improvements in operational efficiency, such as on-time delivery and damage claims ratios.
Through our research, we learned that XPO was making a bold move to reposition itself within the LTL sector. It had recently divested its brokerage and logistics business and was increasing its focus on its LTL segment.
While we recognized this as a potential growth catalyst, it had yet to be noticed by the market.
We also appreciated how XPO was using technology to transform the LTL business. They were bringing advanced IT systems into their terminals to optimize asset usage, improve operational efficiency, and streamline decision-making. In an asset-intensive industry where efficiency can significantly impact profitability, we saw this as a game changer.
But even the best technology needs strong leadership to succeed.
Although XPO’s CEO had an IT background, he recognized the need for a seasoned operator to run the LTL business. So, the company hired a best-in-class leader from Old Dominion Freight Lines, one of the top operators in the LTL industry.
We believe this blend of technology and seasoned leadership, combined with XPO’s competitive advantages in a high-barrier industry, positions the company for continued growth. Even amid the current freight recession, we see substantial upside potential. Our thesis is that, as industry dynamics improve, XPO will be well-positioned to capitalize on its strategic investments and emerge as a leader in the LTL space.
At the end of the day, investing isn’t just about finding undervalued stocks. It’s about understanding the factors that contribute to long-term value creation. Our rigorous process allows us to identify companies that not only have strong financials but also have the management teams, strategic vision, and competitive advantages that will enable them to thrive over time.
XPO is a perfect example of how we identify quality companies. Through our deep research, we uncovered the potential others missed and see a company with a bright future.
Investing in quality may take time, but we’ve discovered it’s often worth the wait.