🗞 The World's Most Selective Investor?

Happy Sunday!

Here’s what’s on the docket for this week’s newsletter:

• 💼 The World’s Most Selective Investor?

• 🇸🇪 An Underrated Serial Acquirer from Sweden

Let’s dive in!

The World’s Most Selective Investor?

Dev Kantesaria is the founder and managing partner of Valley Forge Capital Management, a fund that has earned an estimated 15% annualized return since 2007.

But beyond his nearly two decades of stellar returns, Kantesaria is also famous for being one of the most selective hedge fund managers around.

As of his latest 13-F, Valley Forge owns just 9 companies with the top 4 positions accounting for 85% of the portfolio.

Additionally, when you look at each company, many of them possess very similar characteristics to one another, and that’s not by accident.

Here’s what Dev Kantesaria says he looks for in his companies:

• Monopolies or Oligopolies

• Industry with Strong Secular Trends

• Operating Leverage

• Pricing Power

• Capital-Light 

Given the stringent qualifications that he has, Kantesaria says “our fishing pond for high business qualities is about 50 companies in the world, it’s not hundreds of companies.”

Dev Kantesaria’s Best Investments

1. S&P Global

Dev has found and held several wonderful investments over the last couple decades, one of which is S&P Global.

Given the reputational advantage the company possesses in its Credit Ratings business, S&P requires minimal capital outlays in order to grow, a characteristic that Kantesaria looks for.

Kantesaria initially purchased shares in the after-math of the 2008 crisis likely around the $20 mark, making the stock a more than 25-bagger for him and his firm.

2. Intuit

Valley Forge initiated a position in software giant Intuit in 2016 near $100 per share. Today, the stock trades at more than $700.

Intuit is home to several notable software brands such as Quickbooks, TurboTax, Credit Karma, and many more. Across virtually all of these business lines, the switching costs for customers are quite high which has led to strong pricing power for Intuit.

Additionally, while there are significant fixed costs required to build the platform, the incremental cost to service customers is quite low resulting in highly profitable growth as Intuit has scaled.

3. Fair Isaac Corporation

Fair Isaac Corporation (FICO) is perhaps Kantesaria’s best ever investment.

Valley Forge first began buying shares of the credit score monopoly in 2018 but has continuously added over the years.

As FICO has been able to raise prices in recent years, the company has seen a rapid increase in earnings thanks to the low variable cost nature of the business. In fact, since 2020, FICO has added $423 million in revenue while adding just $44 million in operating expenses. Talk about low-cost growth.

FICO has returned more than 1,000% since his initial purchase.

Partner Spotlight: Compounding Quality

Investment Case: Lifco AB

Lifco in one sentence?

Over 257 different revenue streams that have grown by 31.7% per year.

Lifco is a serial acquirer specializing in buying profitable, stable niche companies. Today, they have 257 (!) subsidiaries.

The Swedish company operates in the following industries:

• Systems Solutions (52.0% of Revenue): Provides specialized products and services for various industries. Amayse is a subsidiary in this segment. They provide 3D advertisements.

• Demolition & Tools (24.4% of Revenue): This division delivers essential equipment and accessories for construction and demolition, like the demolition robot from Lifco’s biggest subsidiary, Brokk.

• Dental (23.6% of Revenue): Supplies top-quality materials, equipment, and solutions for dental professionals worldwide. An example is the production of dental implants.

Lifco’s ideal subsidiaries?

• Market leaders in a niche market

• Family-owned businesses

• A long, stable history and proven profitability

• Not relying on one supplier or customer

Lifco thinks as a quality investor.

And it gets even better.

The company runs on a decentralized model. Acquired businesses keep their independence.

It’s like one big Owner-Operator owning many small Owner-Operators.

“The best acquirers don’t buy companies to fix them, they buy great companies and let them keep doing what made them great.”

Is management capable?

Unlike traditional managers, serial acquirers don’t need to master daily operations. Instead, they focus on one thing: buying great businesses and letting them run independently.

Here’s why that matters:

• Regular managers should be great operators and capital allocators

• Management of serial acquirers only need to be great capital allocators

The great news is that capital allocation is easy to measure.

Per Waldemarson became CEO in 2019.

Let’s see how well he is doing:

Is the company active in an attractive end market?

The interesting thing about serial acquirers is that they don’t operate in just one market. They diversify their revenue streams.

But doesn’t diversifying lower your return?

Not at all.

This reduced risk doesn’t translate to lower returns, quite the opposite.

A regular business is like a snowball rolling downhill, growing steadily as it picks up snow. A serial acquirer, however, is like an avalanche, where multiple snowballs combine.

Lifco benefits from a dual growth engine:

• Organic Growth means expanding through sales and margin improvement

• Acquired Growth is growth that comes from doing more acquisitions

Meme of the Week

In a social media post Friday morning, US President Donald Trump said that Apple will have to pay a 25% tariff on all iPhones made outside the United States in an attempt to reshore production jobs.

With more than 90% of iPhones currently manufactured in China, analysts estimate that American consumers will be paying 25% more for their iPhones if this goes into effect.

While the idea of increasing jobs may sound nice to some, Apple’s likely a long ways away from reshoring the majority of production to the US. The current living wage in Zhengzhou, China (often called “iPhone City”) is estimated to be equivalent to $499 per month. Even if Apple were to eat the 25% tariff themselves (highly unlikely), that’s still a long shot from the cost of production they’d likely have to pay anywhere in the United States.

Apple stock closed down 6% this week.