For investors aiming to assemble a portfolio of lasting, high-performing businesses, the quality investing approach provides a structured 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 long stretches. Instead of searching for the cheapest options, quality investors accept paying a reasonable price for outstanding businesses they can own for many years. An organized method to find these opportunities is using a stock screener that selects for important quantitative signs of quality, like steady revenue and profit expansion, high returns on invested capital, solid free cash flow production, and a prudent balance sheet.
One company that recently appeared using this "Caviar Cruise" quality screen is COMFORT SYSTEMS USA INC (NYSE:FIX). The mechanical and electrical contracting services provider displays a number of traits that match the ideas of quality investing closely.
Financial Strength and Profitability
Central to quality investing is the search for companies that use shareholder capital effectively to produce profits. A key measure for this is Return on Invested Capital (ROIC). The screen asks for an ROIC (leaving out cash, goodwill, and intangibles) greater than 15%, looking for firms that are outstanding capital allocators. FIX greatly passes this level with an ROICexgc of 171.3%, showing a remarkable capacity to produce profits from its operational investments. This is not a temporary result; the company's average ROIC over the last three years is much higher than its industry average, and the newest number shows a rise, suggesting gains in profitability.
Also, the screen stresses the nature of earnings by looking for a high proportion of free cash flow to net income, confirming profits become real, usable cash. FIX's five-year average Profit Quality of 139.5% easily exceeds the 75% filter, meaning it produces more free cash flow than its accounting net income. This notable cash conversion gives the company important financial room for strategic moves, shareholder rewards, or handling economic slowdowns.
Growth and Operational Performance
Quality investing prefers businesses that can expand in a lasting way, not only total sales but, more significantly, their net profits. The screen requires a 5-year CAGR for both revenue and EBIT (earnings before interest and taxes) above 5%, with EBIT growth preferably exceeding revenue growth, a signal of gaining operational efficiency and pricing ability.
- EBIT Growth: FIX reports a solid 5-year EBIT CAGR of 35.7%, showing forceful and steady widening of its core operational earnings.
- Profit Margin Expansion: While the 5-year revenue growth number was not in the given data, the company's fundamental report mentions solid recent revenue growth of 27.7% over the last year. More importantly, the report states that both its Operating Margin (13.4%) and Profit Margin (10.1%) have increased well over the last few years and are rated with the top in the Construction & Engineering industry. This margin growth is a clear sign of a quality business achieving operational leverage and competitive advantage.
Prudent Financial Health
A sign of a quality company is a sound balance sheet that reduces risk and offers stability. The Caviar Cruise screen uses the Debt-to-Free Cash Flow ratio to measure how fast a company could in theory settle all its debts. A ratio under 5 is viewed as acceptable, with lower being preferable. FIX performs very well here, with a very low Debt/FCF ratio of 0.17. This shows the company could clear its complete debt in a short time using its present free cash flow, indicating notable solvency and very little financial risk.
High-Level Fundamental Summary
An examination of FIX's detailed fundamental analysis report supports the results from the quality screen. The company receives an overall fundamental rating of 8 out of 10, with high scores in Profitability (9/10) and Financial Health (9/10). The report describes FIX as a "very profitable company, without any liquidity or solvency issues," and mentions its strong growth picture. While its Price-to-Earnings ratio seems high on its own, the report accepts this could be reasonable given its exceptional profitability and high anticipated earnings growth of over 33% in the next few years.
Valuation Consideration
It is significant to observe that the Caviar Cruise screen purposely does not contain valuation filters. The thinking is that quality has a cost, and investors must form their own judgment of what makes a "reasonable" price for such a business. While FIX sells at a high level based on standard P/E measures, investors must balance that against its superb returns on capital, remarkable cash generation, solid growth path, and very strong balance sheet, all features that usually receive a higher price in the market.
Finding More Quality Candidates
FIX is an example of the kind of company a quality-focused screen can find. Investors wanting to examine other companies that meet similar strict financial filters can execute the screen themselves. You can see the present results and modify the settings using the Caviar Cruise stock screener.
Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation, or an offer or solicitation to buy or sell any securities. The information presented is based on data provided and should not be the sole basis for an investment decision. Investors should conduct their own due diligence and consult with a qualified financial advisor before making any investment decisions.
