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June 15, 2018, 11:14 a.m. EDT

Why this mini-Warren Buffett loves CarMax, Apple, Allison Transmissions and a dozen more stocks

Here are several screens of stocks held by Lou Simpson’s SQ Advisors

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By Philip van Doorn, MarketWatch


Bloomberg
SQ Advisors began building its current position in Apple during the fourth quarter of 2016.

Lou Simpson is a veteran value investor tremendously admired by Warren Buffett. So what can investors learn through a closer look at Simpson’s current holdings, as disclosed in regulatory filings?

For Simpson, value means a company with a track record for good financial performance, along with a relatively low price and low risk. Some can be judged by the numbers, but the rest relies on a more subjective analysis of a company’s position relative to peers and to the opportunities in its industry.

Simpson, a former CEO of Berkshire Hathaway’s /zigman2/quotes/208872451/composite BRK.A +0.02% /zigman2/quotes/200060694/composite BRK.B +0.07% Geico insurance unit and now chairman of SQ Advisors, has said he looks for a high rate of return on invested capital, along with a high cash-flow return and a relatively low ratio of price to cash flow.

As of March 31, SQ Advisors held 15 stocks. Here’s a deeper look at those stocks using some of his criteria.

Return on corporate capital

There are various ways to measure a company’s return on the money that has been invested in it. Return on equity (ROE) only measures operating earnings against how much its shareholders have invested, while return on invested capital (ROIC) measures operating earnings against a company’s equity and long-term debt — pretty much all the money invested in it. The idea is to understand how good a company’s managers are at deploying capital.

But methods of calculating ROIC vary. The Shareholder Forum has developed a similar but uniform measure, return on corporate capital (ROCC), that allows for a quick and free comparison of a company’s numbers to those of its competitors, based the company’s Standard Industrial Classification (SIC), which comes from SEC filings.

ROCC is a company’s annual net income plus interest expense and income taxes, divided by the ending balance of total assets less total liabilities other than interest-bearing debt. It is calculated annually for all publicly traded companies in the U.S. based on annual reports. The idea is a measure how well a company’s management deploys capital for the production of goods and services.

A company’s ROCC is not simply compared to the average ROCC for its SIC group. Instead, a calculation is made for the aggregated assets and income data for the entire SIC group, excluding for the subject company . This means that the industry ROCCs for two companies in the same group may be different.

ROCC is most meaningful within industries, because some are much more capital intensive than others. You can do you own comparisons for free at the Shareholder Forum’s website .

Here are the 15 stocks held by the SQ Advisors as of March 31, along with their five-year average ROCC compared with those of their industry competitors:

Company Ticker SIC group Five-year average ROCC Five-year average ROCC - industry competitors
Allison Transmission Holdings Inc. /zigman2/quotes/209813260/composite ALSN Motor Vehicle Parts and Accessories 11.7% 13.3%
Brookfield Asset Management Inc. Class A /zigman2/quotes/202267951/delayed CA:BAM.A N/A N/A N/A
Charles Schwab Corp. /zigman2/quotes/201281754/composite SCHW Security Brokers, Dealers and Flotation Companies 1.3% 0.9%
CarMax, Inc. /zigman2/quotes/204412041/composite KMX Retail Auto Dealers and Gasoline Stations 7.5% 10.8%
Liberty Global PLC Class C /zigman2/quotes/205064666/composite LBTYK Cale and Other Pay Television Services 2.2% 11.1%
Cable One Inc. /zigman2/quotes/207363308/composite CABO Cable and Other Pay Television Services 14.9% 10.1%
Apple Inc. /zigman2/quotes/202934861/composite AAPL Electronic Computers 28.0% 6.5%
Sensata Technologies Holding PLC /zigman2/quotes/205854600/composite ST Industrial Instruments for Measurement, Display and Control 8.4% 10.9%
Tyler Technologies Inc. /zigman2/quotes/208092302/composite TYL Services - Prepackaged Software 18.2% 12.6%
Charter Communications Inc. Class A /zigman2/quotes/201656355/composite CHTR Cable and Other Pay Television Services 3.4% 11.0%
Berkshire Hathaway Inc. Class B /zigman2/quotes/200060694/composite BRK.B Fire, Marine and Casualty Insurance 5.9% 2.8%
Liberty Broadband Corp. Class C /zigman2/quotes/207995235/composite LBRDK Cable and Other Pay Television Services 5.1% 10.1%
Axalta Coating Systems Ltd. /zigman2/quotes/204422049/composite AXTA Paints, Varnishes, Lacquers, Enamels and Allied Products 4.3% 16.8%
SBA Communications Corp. Class A /zigman2/quotes/208397406/composite SBAC Real Estate Investment Trusts 4.4% 4.0%
Hexcel Corp. /zigman2/quotes/209574944/composite HXL Plastics, Materials, Synth Resins and Nonvolcan Elastomers 16.7% 15.3%
Source: SEC 13-F filing for March 31, 2018 ; the Shareholder Forum

ROCC calculations aren’t available for Brookfield Asset Management because it is registered in Canada and does not file standard 10-K annual reports with the SEC,.

Out of the 14 companies for which the calculations are available, only eight have five-year average ROCC that are higher than those of their competitors. Apple /zigman2/quotes/202934861/composite AAPL +0.48% , Cable One /zigman2/quotes/207363308/composite CABO -0.54% , Tyler Technologies /zigman2/quotes/208092302/composite TYL -1.79%  and Berkshire Hathaway have greatly outperformed their competitors on this basis.

/zigman2/quotes/208872451/composite
US : U.S.: NYSE
$ 313,270
+70.00 +0.02%
Volume: 182.00
Oct. 18, 2019 6:30p
P/E Ratio
17.77
Dividend Yield
N/A
Market Cap
$511.95 billion
Rev. per Employee
$637,113
loading...
/zigman2/quotes/200060694/composite
US : U.S.: NYSE
$ 208.76
+0.14 +0.07%
Volume: 3.58M
Oct. 18, 2019 6:30p
P/E Ratio
17.75
Dividend Yield
N/A
Market Cap
$511.74 billion
Rev. per Employee
$637,113
loading...
/zigman2/quotes/209813260/composite
US : U.S.: NYSE
$ 45.08
-0.02 -0.04%
Volume: 586,834
Oct. 18, 2019 6:30p
P/E Ratio
8.71
Dividend Yield
1.33%
Market Cap
$5.43 billion
Rev. per Employee
$935,517
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/zigman2/quotes/202267951/delayed
CA : Canada: Toronto
$ 70.08
-0.10 -0.14%
Volume: 772,936
Oct. 18, 2019 4:00p
P/E Ratio
18.09
Dividend Yield
1.21%
Market Cap
$70.67 billion
Rev. per Employee
$929,968
loading...
/zigman2/quotes/201281754/composite
US : U.S.: NYSE
$ 39.94
+0.49 +1.24%
Volume: 7.58M
Oct. 18, 2019 6:30p
P/E Ratio
14.79
Dividend Yield
1.70%
Market Cap
$52.21 billion
Rev. per Employee
$563,538
loading...
/zigman2/quotes/204412041/composite
US : U.S.: NYSE
$ 94.28
+1.55 +1.67%
Volume: 1.70M
Oct. 18, 2019 6:30p
P/E Ratio
18.12
Dividend Yield
N/A
Market Cap
$15.50 billion
Rev. per Employee
$714,405
loading...
/zigman2/quotes/205064666/composite
US : U.S.: Nasdaq
$ 24.35
+0.11 +0.45%
Volume: 4.19M
Oct. 18, 2019 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$17.79 billion
Rev. per Employee
$449,545
loading...
/zigman2/quotes/207363308/composite
US : U.S.: NYSE
$ 1,296.94
-7.05 -0.54%
Volume: 15,072
Oct. 18, 2019 6:30p
P/E Ratio
47.74
Dividend Yield
0.69%
Market Cap
$7.40 billion
Rev. per Employee
$482,147
loading...
/zigman2/quotes/202934861/composite
US : U.S.: Nasdaq
$ 236.41
+1.13 +0.48%
Volume: 24.38M
Oct. 18, 2019 4:00p
P/E Ratio
20.15
Dividend Yield
1.30%
Market Cap
$1068.38 billion
Rev. per Employee
$1.98M
loading...
/zigman2/quotes/205854600/composite
US : U.S.: NYSE
$ 50.45
+0.33 +0.66%
Volume: 478,076
Oct. 18, 2019 6:30p
P/E Ratio
14.90
Dividend Yield
N/A
Market Cap
$8.13 billion
Rev. per Employee
$161,827
loading...
/zigman2/quotes/208092302/composite
US : U.S.: NYSE
$ 263.23
-4.80 -1.79%
Volume: 187,105
Oct. 18, 2019 6:30p
P/E Ratio
81.09
Dividend Yield
N/A
Market Cap
$10.16 billion
Rev. per Employee
$206,692
loading...
/zigman2/quotes/201656355/composite
US : U.S.: Nasdaq
$ 440.05
-1.88 -0.43%
Volume: 821,667
Oct. 18, 2019 4:00p
P/E Ratio
74.58
Dividend Yield
N/A
Market Cap
$97.46 billion
Rev. per Employee
$445,245
loading...
/zigman2/quotes/200060694/composite
US : U.S.: NYSE
$ 208.76
+0.14 +0.07%
Volume: 3.58M
Oct. 18, 2019 6:30p
P/E Ratio
17.75
Dividend Yield
N/A
Market Cap
$511.74 billion
Rev. per Employee
$637,113
loading...
/zigman2/quotes/207995235/composite
US : U.S.: Nasdaq
$ 111.02
-0.12 -0.11%
Volume: 1.33M
Oct. 18, 2019 4:00p
P/E Ratio
281.21
Dividend Yield
N/A
Market Cap
$20.15 billion
Rev. per Employee
$428,000
loading...
/zigman2/quotes/204422049/composite
US : U.S.: NYSE
$ 28.79
-0.01 -0.03%
Volume: 2.18M
Oct. 18, 2019 6:30p
P/E Ratio
33.21
Dividend Yield
N/A
Market Cap
$6.72 billion
Rev. per Employee
$335,429
loading...
/zigman2/quotes/208397406/composite
US : U.S.: Nasdaq
$ 244.10
+4.06 +1.69%
Volume: 940,184
Oct. 18, 2019 4:00p
P/E Ratio
212.26
Dividend Yield
0.61%
Market Cap
$27.61 billion
Rev. per Employee
$1.39M
loading...
/zigman2/quotes/209574944/composite
US : U.S.: NYSE
$ 76.17
-0.55 -0.72%
Volume: 498,090
Oct. 18, 2019 6:30p
P/E Ratio
22.09
Dividend Yield
0.89%
Market Cap
$6.48 billion
Rev. per Employee
$330,516
loading...
/zigman2/quotes/202934861/composite
US : U.S.: Nasdaq
$ 236.41
+1.13 +0.48%
Volume: 24.38M
Oct. 18, 2019 4:00p
P/E Ratio
20.15
Dividend Yield
1.30%
Market Cap
$1068.38 billion
Rev. per Employee
$1.98M
loading...
/zigman2/quotes/207363308/composite
US : U.S.: NYSE
$ 1,296.94
-7.05 -0.54%
Volume: 15,072
Oct. 18, 2019 6:30p
P/E Ratio
47.74
Dividend Yield
0.69%
Market Cap
$7.40 billion
Rev. per Employee
$482,147
loading...
/zigman2/quotes/208092302/composite
US : U.S.: NYSE
$ 263.23
-4.80 -1.79%
Volume: 187,105
Oct. 18, 2019 6:30p
P/E Ratio
81.09
Dividend Yield
N/A
Market Cap
$10.16 billion
Rev. per Employee
$206,692
loading...
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