Simon Handrahan: CPRT, XPEL, DHR
By Simon Handrahan
Published:
Can you tell us a little bit about yourself? What is your background?
I grew up on the east coast of Canada and, after studying chemical engineering, moved to Ontario to a small town a few ours from Toronto for work. Even though I have never worked in finance professionally, investing has been a passion of mine for well over a decade. I’ve been managing my own money since I had a few extra dollars as a teenager, more seriously since I had a steady income from an engineering job.
What is your overall investment philosophy or strategy?
It has evolved from a shallow thinking of paying low multiples for stocks to one where the multiple plays very little consideration. I would say I try to still be open minded regarding strategy and think there are plenty of ways to make money. It’s definitely more about how well the investor fits the strategy and every strategy has its moments in time as well.
Currently my focus has been on holding very high quality businesses at fair prices. Generally what that means is looking for boring businesses that aren’t going to change quickly, are asset light and/or have long reinvestment runways or great means of returning money to shareholders if they don’t have reinvestment opportunities. This last part is less about the business model and more about the management team. I generally look for a management team wih high integrity (consistently do what they say they will) and are aligned with shareholders. Often this means high insider ownership and founder led or similar organizations. Beyond these high quality businesses, I’ve been looking for a few microcap businesses to own. These are so small and sparsely traded that funds can’t own them and they have no analysts covering them. The advantage here is I can be more likely to find mispriced securities given the overlooked nature of their ownership and analysis.
How do you research and analyze stocks before making an investment decision?
I try to avoid drawing any conclusions before I have finished gathering information, data and insights. I typically read the filings first (10-k, proxy, etc. for US stocks) and then anything else I can find from other investors (short and long thesis’s if possible). I leave the management presentation till the end as this tends to be what they want you to see and it can frame your opinion with too much optimism off the start. However possible, I like to understand the customer experience and ideally hear what the supplier and employee experience is like.
In general, I try to weed out low quality as quickly as possible. I have a few things that immediately make it a NO, so I can move on. Lack of consistent profit and free cash flow is the easiest. The business model being complex is another quick way to say no. Cyclical businesses exposed to commodity with no pricing power is typically a quick no for me as well. It’s not that you can’t make money there but from my experience, I likely am not the person who will figure it out.
What criteria do you use to select stocks for your portfolio?
They have to be much better than my current worst idea. Generally, that means something like 50% better than the smallest or lowest conviction idea. This is a way to combat against “the shiny new thing” looking more appealing than it actually is.
What is your approach to risk management?
Don’t settle on quality of management and don’t overpay.
How do you monitor and adjust your portfolio over time?
I try not to adjust as much as possible. Let the winners win.
Have you had any notable successes or failures with specific stocks or investments (recently)? What did you learn from these experiences?
A couple of years ago, I bought Vitalhub which is a small business rolling up software in the healthcare field. It had not yet consistently been profitable and it had setup a labor pool offhsores in a Sri Lankan office. I neglected these two risks and only focused on topline growth and copying other rollup successes as my thesis. I sold when there was regional risk in Sri Lanka and took a small loss. I learned to not be so eager to find the next great Constellation Software or Jack Henry and be okay with waiting for the business to prove it is sustainable first. I also learned about arbitrage risk - in this case there was cost to a cheaper talent pool.
(Constellation Software profit margin, financials estimate, dividends)
How many stocks do you typically hold in your portfolio? And can you tell us some of them?
I have held between 15-25 over the last few years. These days I am holding towards the lower end. Some significant sized names in the portfolio include: Constellation Software, Xpel, Alimentation Couchetard, Atlas Engineered Products, Brookfield Corporation, OTC Markets, Copart, Visa (analysis), Leat, Vitreous Glass, Autozone, Danaher, Thermo Fisher Scientific, Tabletrac.
(Danaher number of job openings and employees)
What is your portfolio allocation across different market capitalizations?
Nano cap (10’s of millions) to megacap (100’s of billions).
How often do you rebalance your portfolio?
I don’t.
What inspired you to start writing about investing, and how did you get interested in the subject?
I wanted to keep track of my investment thesis and future potential ideas better. Writing was something I didn’t do enough and to do it in a public way made myself more accountable to better quality thought. Basically, it was a way to combat my own lazyness. The other motivation was to get some critical feedback on my ideas and my investment approach.
How do you stay disciplined and avoid emotional investing decisions?
I don’t watch CNBC. I try to avoid checking my portfolio too frequently (not usually successful here). I have tried to avoid doing anything with investments when my mood or physical state is off. Go for a walk to reset, get lots of sleep (hard with kids). In addition, I generally don’t make buy or sell decisions too quickly. I tend to defer both longer than I am even comfortable with and this is like a muscle that grows stronger with time. Understanding myself as a person helps to some extent with the biases. Having some form of checklist helps. The other fundamental thing is to only think about buying in terms of the longer term (5-10 years). This helps distinguish from much of the noise that is short term in nature.
How do you see the investing landscape evolving in the next 5-10 years, and how do you plan to adapt your strategy to changing market conditions?
I’ll try my best to be open minded and see the world for how it is and not how I wish it to be. In that sense, I have no idea what will happen.
