How to Find the Best Long Term Investments

I’m just about finished with an absolutely fantastic book by William Thorndike called The Outsiders: Eight Unconventional CEO’s and Their Radically Rational Blueprint for Success.  I highly recommend this book to anyone that runs their own company, manages people at work or makes investment decisions in stocks (for themselves or others).

I often say that the most important thing to evaluate when researching a company to invest in is the management team, and this book certainly reinforces that point.  A CEO has two main roles: 1) make sure things are running smoothly, and more importantly 2) make the big-picture, strategic capital allocation decisions (both human capital and financial capital).

Thorndike argues that the best way to evaluate the performance of a CEO is solely by the returns for their shareholders of the company over the long term.  These were the only 8 CEO’s he could find which generated outperformance over both their peers and the famous Jack Welch of GE (which they all blew away!).  He found that even though they all came from unrelated backgrounds, all seemed to follow the same guidelines when running their companies.  They focused on capital allocation, increase in the per share value of the stock (not overall growth or size), and cash flow (not reported earnings).  They also utilized decentralized organizational structures and stayed committed to their plan, which was often very different from their industry peers and brought tons of criticism from Wall Street.  In the end though, they all had the last laugh.

This book made me think about all of the stocks my clients own in another light and a few companies really jumped out to me as having CEO’s that could fit this mold.  One company in particular is CF Industries, which interestingly just changed CEO’s in January of this year.  I really like what the new CEO is focusing on and began aggressively adding to the position after last week’s earnings conference call.

CF has repurchased roughly 32% of its outstanding shares since 2010 and just announced an additional $1 billion buyback program through 2016.  At one point during the middle of the call, the CEO said “We think our stock is undervalued and represents a great opportunity.”  They’re investing in their highest return projects to boost production capabilities by 25%, selling off lower return business units to raise cash and also announced an increase in the dividend to $1.50/quarter.  The CEO stated that they’re targeting a dividend yield of roughly 1.5% to 2% to stay in line with the S&P 500.  Later in the call, during the Q&A, one analyst pointed out that at $1.50/quarter their dividend yield is around 2.4% which is higher than the S&P 500.  The CEO replied “I’m looking ahead,” implying he felt the stock was 25% undervalued and will rise bringing the yield down, and followed up with “Our shares are a screaming value right here.”

Now that is a CEO that recognizes value and is not afraid to take drastic actions in order to capitalize on opportunities.  That’s a CEO I want to invest with!

CF Industries (CF) – 3 year, weekly

Thanks for following and have a great weekend!

-Nick

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