For investors aiming to assemble a portfolio of lasting, well-managed businesses, the quality investing method presents a useful framework. This approach centers on finding companies with durable competitive strengths, high profitability, and sound financial condition, with the plan of keeping them for many years. One organized method to discover these companies is through the "Caviar Cruise" stock screen, which selects for firms displaying better-than-average past revenue and profit increases, high returns on invested capital, solid cash generation, and reasonable debt. The aim is not to locate temporary discounts, but to possess outstanding businesses that can increase value over years.
A recent prospect clearing this strict screen is CRA International Inc (NASDAQ:CRAI), a worldwide consulting firm focused on economic, financial, and management advisory services. We will look at how CRAI matches the main ideas of quality investing.
Matching the Main Quality Standards
The Caviar Cruise screen uses several measurable filters to search for quality. CRAI's financial picture shows good agreement with these central ideas:
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Profitability and Capital Use: A fundamental part of quality investing is a high return on invested capital (ROIC), which shows a company's skill at creating profits from its capital. CRAI performs well here, with an ROIC (leaving out cash, goodwill, and intangibles) near 23.0%, well above the screen's 15% limit. This implies the firm uses its intellectual and financial capital with high effectiveness, building notable value for shareholders.
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Profit Increase Surpassing Revenue Increase: The screen demands that a company's earnings before interest and taxes (EBIT) increase quicker than its revenue over a five-year span. This points to better operational scale and pricing ability. CRAI's EBIT has increased at a compound yearly rate of 19.3% over the last five years, easily meeting the screen's need and showing the business is becoming more profitable as it gets larger.
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Good Cash Flow Generation: Quality investors value profits supported by actual cash. The "Profit Quality" measure calculates how much net income becomes free cash flow. CRAI's five-year average profit quality is a notable 120.1%, exceeding the 75% filter. This shows the company's accounting profits are fully received as cash, giving financial room for dividends, share repurchases, or strategic projects without depending on debt.
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Cautious Financial Setup: To confirm stability, the screen checks debt compared to free cash flow. CRAI's Debt-to-Free Cash Flow ratio is 3.3, which is inside the screen's allowed limit of below 5. This ratio means the company could pay off all its debt with less than three and a half years of present cash flow, showing a careful balance sheet that can handle economic slowdowns.
Fundamental Analysis Summary
An examination of CRAI's wider fundamental analysis report gives a fuller view, mostly supporting the quality argument. The company receives a good total rating, with specific high points in profitability. Its return on equity and profit margins score well inside the competitive professional services field. Increase has been solid, with good past results in both earnings per share and revenue.
The report does mention some points for thought. Valuation measures indicate the stock is valued at a high level compared to its own past and the wider market, which is typical for high-quality companies. There are also small notes about short-term liquidity ratios. Still, these are balanced by the company's good financial health, absence of major debt issues, and a steady, increasing dividend history.
The Non-Quantitative Match for a Quality Portfolio
Beyond the figures, CRAI's business model has several non-quantitative features that quality investors look for. The firm works in a specialized consulting area, litigation support and complex regulatory issues, where its deep knowledge builds a competitive barrier. This knowledge is not simple to copy and gives pricing ability. Its services are often essential for clients during disputes or large deals, making the business somewhat steady through economic phases. Also, as a pure consulting firm, its model requires few physical assets and can grow, matching the high returns on capital the screen found.
Finding Other Quality Prospects
CRA International Inc offers a useful example of a company that clears a strict, number-based screen for quality traits. For investors wanting to use this method to locate other possible prospects, the Caviar Cruise screen is a practical beginning. You can see and adjust the screen to do your own study here.
Disclaimer: This article is for information only and is not financial guidance, a suggestion, or an offer to buy or sell any security. The analysis uses data and a specific screening method; investors should do their own complete research and think about their personal money situation before making any investment choices.
