For investors looking to assemble a portfolio of lasting, high-achieving businesses, the quality investing method presents a strong framework. This method centers on finding companies with durable competitive strengths, sound financial condition, and a demonstrated history of producing high returns on capital over many years. One organized way to find these companies is the "Caviar Cruise" stock screen, which selects for firms showing better revenue and profit increases, high returns on invested capital, strong cash flow production, and a careful debt structure. The aim is not to locate temporary discounts, but to hold outstanding businesses able to increase value for a long time.
Fitting the Caviar Cruise Standards
A recent execution of this screen identified CHIPOTLE MEXICAN GRILL INC (NYSE:CMG) as a possible candidate. The fast-casual restaurant chain seems to match the screen's numerical filters for quality, which are created to find businesses with effective operations and financial soundness.
- Growth & Profitability Increase: The screen demands at least 5% yearly increase in both revenue and EBIT (earnings before interest and taxes) over five years. Chipotle greatly surpasses this, with a 5-year revenue CAGR of 10.7% and a strong EBIT CAGR of 32.3%. Importantly, EBIT increase greatly exceeds revenue increase, a main filter that points to better operational effectiveness and possible pricing strength, signs of a quality business with competitive strengths.
- Outstanding Capital Effectiveness: A core idea of quality investing is evaluating how effectively a company uses its capital. The screen requires a Return on Invested Capital (leaving out cash and goodwill) over 15%. Chipotle's ROIC of 22.2% shows it produces significant profit from each dollar put into the business, ranking it with the best in its field and indicating a lasting advantage.
- Financial Soundness & Cash Flow Character: The method stresses financial durability by requiring debt to be below five times free cash flow. Chipotle is notable with a Debt/FCF ratio of 0.0, showing a balance sheet with no net debt. Also, the screen seeks high "profit character," calculated as the 5-year average change of net income into free cash flow. Chipotle's result of 100.4% shows that its accounting profits are completely turned into usable cash, giving great ability for new investment, share repurchases, or handling economic slowdowns.
Fundamental Analysis Summary
A wider fundamental analysis of Chipotle supports the screen's conclusions. The company receives a high total fundamental rating of 7 out of 10, led by excellent scores in profitability (9/10) and financial condition (8/10). Its return on equity and assets are top in its industry, and both operating and net profit margins have displayed steady gains. The main point of care comes from the valuation rating (3/10), which indicates the stock sells at a high level compared to the market and its own past measures. For quality investors, this highlights the idea that while quality carries a cost, investment choices still need a careful evaluation of price.
A Quality Business Model in Action
Apart from the figures, Chipotle displays several non-numerical characteristics valued by quality investors. The company runs a straightforward, clear, and expandable business model focused on a limited menu of "food with integrity." It keeps strong pricing ability, shown by its widening margins, and has a long path for increase through new restaurant launches and digital sales. Its direct control of restaurants (instead of a franchise model) enables strict command over customer experience and operations. While the restaurant field is competitive, Chipotle's brand power, supply chain control, and digital platform add to the competitive strength seen in its financial numbers.
Locating Additional Quality Candidates
Chipotle Mexican Grill acts as a leading example of the kind of company the Caviar Cruise screen tries to find: a financially sound, very profitable business with effective growth. Investors curious about examining other companies that meet these strict quality filters can see the complete screen results here.
Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation, or an offer to buy or sell any security. Investors should conduct their own research and consult with a qualified financial advisor before making any investment decisions.
