What is a Quality Stock – and Other Questions Answered

Here we highlight two questions which we feel may be of interest to our readers that came up in our annual client presentation in November.

What is a quality stock and what is an example that is owned in the Nexus portfolios?

“Quality”, as a style of investing, has been getting a lot of press recently. Many academic studies have been written that suggest that equity strategies stressing quality have proven to be less volatile than broad equity indices and to generate higher returns. At Nexus, we have always embraced a quality approach to investing. When screening for stocks in which to invest, we are diligent to judge companies on their balance sheet leverage, business cyclicality, valuation, profitability, ability and willingness to pay dividends, and management’s capability. One such company that we hold in portfolios and which feel exhibits these attributes is CarMax.

CarMax is the leading seller of used cars in the U.S. It does so through a chain of superstores that typically offer a selection of up to 600 cars on the lot and thousands more that are available in its network and can be viewed on its website.

Whereas the typical used car shopping experience is one of sales pressure from slimy salesmen looking to sell cars of uncertain quality and reliability, CarMax’s mission is to offer a better way to buy used cars. It offers an environment of selection, no-haggle pricing, and product guarantees. Salesmen are compensated in a way that encourages them to sell the best car for a customer, not the most expensive one.

It is this “better mousetrap” that is a key aspect of CarMax’s quality. It acts as a moat around its business that defends it against competitors who are still operating the old way. These competitors principally are Mom & Pop outfits that don’t have the skill or scale that CarMax has, and it is new car dealers that typically sell used cars as an after-thought to facilitate new car sales. CarMax has about 140 stores in the U.S. at present and we believe it can grow to at least 300 stores.

CarMax also is a high quality company from a financial point of view. Excluding the debt in its financing subsidiary, the company is almost entirely self-financing. It has a high return on equity with virtually no debt needed in its base business. Selling cars is a cyclical business, but we think CarMax operates in an attractive niche and is sufficiently strong that tough times may present an opportunity to get even further ahead of the competition.

In many cases, real estate holdings make up a big part of our net worth. When should we consider downsizing or selling a vacation property?

There are countless opinions about future real estate values and a myriad of non-monetary considerations that need to be taken into account before making a decision to sell a family home or vacation property, so we don’t generally advise on this decision but we can help with the process.  There are two equally important parts to the process:

• The first is the emotional or lifestyle side of downsizing or selling a property.
• The second is the financial process and looking at the financial implications of downsizing or selling.

The emotional or lifestyle considerations are very personal and, while we can’t make this decision for you, we can help you think about the important questions you need to ask yourself like “how important is outdoor space” and “how much do you travel”?

Regarding the financial process, this part is in our wheelhouse, as we can help with a properly constructed financial plan.  It is straight forward for us to calculate the financial implications, or sensitivities, of such a decision, given a specific set of assumptions about selling price, buying or renting, changes in expenses and so on. These “hard” numbers can provide a helpful framework for making a decision which is so often full of emotion, memories and sentimentality.

A properly constructed financial plan from Nexus can give you the confidence to contemplate early retirement, future travel and the pursuit of long sought-after activities or hobbies. You might find it an important step to getting on with the rest of your life.