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Aug. 7, 2021, 11:27 a.m. EDT

10 stocks that have what it takes to be a ‘perfect’ company

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By Lawrence A. Cunningham

My recent column describing  the “perfect company”  elicited several nominees from readers. They’re worth sharing and may even provide the basis for constructing a portfolio.

As a recap, a colleague once defined the perfect company as requiring no incremental capital, yielding functionally infinite returns, and maintaining a long-term view. The perfect company’s leader must excel at allocating capital, chiefly through serial acquisitions of businesses thereafter managed in a decentralized structure based on trust.

Acknowledging that such companies are rare, readers suggested numerous examples. These 10, listed below in alphabetical order, were mentioned multiple times: 

1. Adobe /zigman2/quotes/200389143/composite ADBE +2.94%

2. Alphabet (Google) /zigman2/quotes/202490156/composite GOOGL +5.11% /zigman2/quotes/205453964/composite GOOG +5.19%

3. Berkshire Hathaway /zigman2/quotes/208872451/composite BRK.A +3.75% /zigman2/quotes/200060694/composite BRK.B +4.02%

4. Constellation Software /zigman2/quotes/203440310/delayed CA:CSU +3.70% /zigman2/quotes/207942620/delayed CNSWF +4.77%

5. Danaher /zigman2/quotes/210555154/composite DHR +0.65%

6. Fairfax Financial Holdings /zigman2/quotes/207415723/delayed CA:FFH +2.01%

7. Illinois Tool Works /zigman2/quotes/208031922/composite ITW +4.34%

8. Johnson & Johnson /zigman2/quotes/201724570/composite JNJ +1.46%

9. Markel /zigman2/quotes/207564531/composite MKL +1.75%

10. Roper Technologies /zigman2/quotes/204270015/composite ROP +3.41%

These companies operate in industries generally requiring zero or modest incremental capital — insurance, sciences, technology and software.  That meets the first hurdle. 

Their leadership is strong, often iconic, and certainly long-term. Berkshire’s Warren Buffett, Constellation’s Mark Leonard, and Fairfax’s Prem Watsa have personified their companies for decades, and all developed a deep bench of like-minded managers.  A succession of impressive leaders has run all the others, such as the Rales brothers at Danaher and the Markel family at their eponymous company.

Acquisition discipline is evidenced by high returns on capital deployed, the companies’ opportunistic character, and their relative obscurity.  As for the latter, only a few of the thousands of acquisitions made by these 10 companies are marquee names on the order of Adobe’s Photoshop, Alphabet’s YouTube, or Berkshire’s Dairy Queen.  Most people haven’t heard of the majority of the businesses these companies have acquired.  ISCAR, Pall, Quipp, Vertafore anyone?

Acquisition frequency and scale vary. Constellation, for example, has made hundreds of small acquisitions while Illinois Tool Works has made perhaps 1,000. Adobe, Danaher, Fairfax, and Markel have made dozens or scores of purchases, some of considerable size. The others are all over the map in number and sizes. One thing these investors have in common is that they wait for their pitch.

All of these companies are organized along decentralized lines. Headquarters delegates substantial autonomy to the heads of the various businesses. Trust permeates their cultures.

The data back up the impressions. For instance, these companies repeatedly lead the pack in rankings of attributes of the perfect company, such as  capital allocation prowess  and  decentralized trust-based cultures .

They are also notable for the  longevity of their leadership  and insider ownership of the stock ( especially by directors , suggesting they “get” the perfect company).

Not coincidentally, all 10 companies  rank high in attracting  long-term focused (“ quality ”) shareholders. They also rank high in the caliber of their  shareholder communications — a logical add-on of the perfect company from the shareholders’ viewpoint.             

In short, readers have helpfully identified “perfect companies” in the sense my colleague described.  Whether these companies are perfect investments depends on their prevailing stock price.  But they certainly warrant a close look.

Lawrence A. Cunningham is a professor at George Washington University, founder of the Quality Shareholders Group, and publisher, since 1997, of “The Essays of Warren Buffett: Lessons for Corporate America.” Cunningham owns shares of Berkshire Hathaway, Constellation Software and Markel. He is a director and vice-chairman of Constellation Software. For updates on Cunningham’s research about quality shareholders, sign up here

More: Here’s the recipe for a ‘perfect business’ — and a tasty stock

Also read: Smart stock investors know to check this telling sign of a company’s health

/zigman2/quotes/200389143/composite
US : U.S.: Nasdaq
$ 387.72
+11.08 +2.94%
Volume: 3.31M
June 24, 2022 4:00p
P/E Ratio
37.85
Dividend Yield
N/A
Market Cap
$183.20 billion
Rev. per Employee
$608,011
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/zigman2/quotes/202490156/composite
US : U.S.: Nasdaq
$ 2,359.50
+114.66 +5.11%
Volume: 2.06M
June 24, 2022 4:00p
P/E Ratio
21.34
Dividend Yield
N/A
Market Cap
$1557.36 billion
Rev. per Employee
$1.65M
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/zigman2/quotes/205453964/composite
US : U.S.: Nasdaq
$ 2,370.76
+117.07 +5.19%
Volume: 1.96M
June 24, 2022 4:00p
P/E Ratio
21.44
Dividend Yield
N/A
Market Cap
$1557.36 billion
Rev. per Employee
$1.65M
loading...
/zigman2/quotes/208872451/composite
US : U.S.: NYSE
$ 417,401
+15,101 +3.75%
Volume: 2,121
June 24, 2022 3:59p
P/E Ratio
7.49
Dividend Yield
N/A
Market Cap
$613.96 billion
Rev. per Employee
$742,188
loading...
/zigman2/quotes/200060694/composite
US : U.S.: NYSE
$ 278.28
+10.76 +4.02%
Volume: 6.45M
June 24, 2022 4:03p
P/E Ratio
7.49
Dividend Yield
N/A
Market Cap
$613.96 billion
Rev. per Employee
$742,188
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/zigman2/quotes/203440310/delayed
CA : Canada: Toronto
$ 1,948.66
+69.49 +3.70%
Volume: 30,597
June 24, 2022 4:00p
P/E Ratio
78.91
Dividend Yield
0.26%
Market Cap
$41.30 billion
Rev. per Employee
N/A
loading...
/zigman2/quotes/207942620/delayed
US : U.S.: OTC
$ 1,510.00
+68.78 +4.77%
Volume: 272.00
June 24, 2022 3:59p
P/E Ratio
76.74
Dividend Yield
0.26%
Market Cap
$31.98 billion
Rev. per Employee
N/A
loading...
/zigman2/quotes/210555154/composite
US : U.S.: NYSE
$ 256.83
+1.65 +0.65%
Volume: 2.92M
June 24, 2022 4:06p
P/E Ratio
29.74
Dividend Yield
0.39%
Market Cap
$186.74 billion
Rev. per Employee
$368,163
loading...
/zigman2/quotes/207415723/delayed
CA : Canada: Toronto
$ 636.77
+12.55 +2.01%
Volume: 73,519
June 24, 2022 4:00p
P/E Ratio
5.22
Dividend Yield
1.98%
Market Cap
$15.65 billion
Rev. per Employee
$762,057
loading...
/zigman2/quotes/208031922/composite
US : U.S.: NYSE
$ 187.92
+7.82 +4.34%
Volume: 1.51M
June 24, 2022 4:00p
P/E Ratio
22.08
Dividend Yield
2.60%
Market Cap
$58.53 billion
Rev. per Employee
$321,222
loading...
/zigman2/quotes/201724570/composite
US : U.S.: NYSE
$ 182.29
+2.63 +1.46%
Volume: 9.37M
June 24, 2022 4:00p
P/E Ratio
24.55
Dividend Yield
2.48%
Market Cap
$479.68 billion
Rev. per Employee
$661,665
loading...
/zigman2/quotes/207564531/composite
US : U.S.: NYSE
$ 1,292.86
+22.27 +1.75%
Volume: 131,972
June 24, 2022 4:00p
P/E Ratio
10.10
Dividend Yield
N/A
Market Cap
$17.54 billion
Rev. per Employee
$632,391
loading...
/zigman2/quotes/204270015/composite
US : U.S.: NYSE
$ 407.71
+13.43 +3.41%
Volume: 945,616
June 24, 2022 4:03p
P/E Ratio
39.13
Dividend Yield
0.61%
Market Cap
$43.18 billion
Rev. per Employee
$299,368
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