What is a Quality Stock – and Other Questions Answered

Topic: Investments

James E. Houston CIM, FCSI

July 17, 2015


Print & Share

Print

What is a Quality Stock – and Other Questions Answered

Whenever we host client events, like the annual event at the National Club or our regular pooled fund lunches in the office, it’s a good opportunity to hear what is on our clients’ minds and to answer questions at the end of our presentations.

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.

More Like This...

See another CRM2 blog post that may be of interest to you.

CRM2: The Nexus Approach to our CRM2 Reports

Topic:
CRM2
Excerpt:
With changing securities regulations coming into effect, investment firms are now required to provide individual investors with specific additional in

More Like This...

See another Foundations & Endowments blog post that may be of interest to you.

Charitable Giving Made Easier

Topic:
Foundations & Endowments
Excerpt:
Giving to charities and supporting our community are important to us at Nexus. We donate a portion of our management fees back to the charities and

More Like This...

See another Human Interest blog post that may be of interest to you.

The Case for Openness – An Open and Shut Case?

Topic:
Human Interest
Excerpt:
From time immemorial, mankind has been open. Open to new ideas, open to trade, and open to migration – the three critical ingredients for progress.

More Like This...

See another Inside Nexus blog post that may be of interest to you.

Welcome Aboard: Investing in Our Team

Topic:
Inside Nexus
Excerpt:
Nexus recently welcomed Harsh Narsinghani, Vice President & Portfolio Manager, as the newest member of the investment team. His arrival is the latest

More Like This...

See another Investments blog post that may be of interest to you.

Don’t Worry, Be Happy

Topic:
Investments
Excerpt:
A recent article by David Brooks in The Atlantic magazine argues that, despite the heavy shroud of pessimism that envelopes most of our current

More Like This...

See another Pearls of Wisdom blog post that may be of interest to you.

“Work, Work, Work, Work, Work, Work”

Topic:
Pearls of Wisdom
Excerpt:
This has been a busy year. I’ve had lots happening on the home front (a wedding!) and lots going on at the office (too long to list!) Managing work

More Like This...

See another Tax Planning blog post that may be of interest to you.

Saving in my Professional Corporation – It’s a Great Idea!

Topic:
Tax Planning
Excerpt:
The ability for professionals in Canada to incorporate their practice has existed for some time. Doctors, dentists, lawyers, accountants, and other

More Like This...

See another Wealth Planning blog post that may be of interest to you.

Dentists Get Their Financial Check-Up: Nexus attends the 2022 Ontario Dental Conference

Topic:
Wealth Planning
Excerpt:
In early May, we had the opportunity to attend the Ontario Dental Association’s (ODA) Annual Spring Meeting (ASM) in Toronto. Now in its 157th year,

On a Side Note…

See another CRM2 Nexus Notes Quarterly article that may be of interest to you.

No posts found.

On a Side Note…

See another Foundations & Endowments Nexus Notes Quarterly article that may be of interest to you.

Charitable Giving Made Easier

Topic:
Foundations & Endowments
Excerpt:
Giving to charities and supporting our community are important to us at Nexus. We donate a portion of our management fees back to the charities and

On a Side Note…

See another Human Interest Nexus Notes Quarterly article that may be of interest to you.

The Case for Openness – An Open and Shut Case?

Topic:
Human Interest
Excerpt:
From time immemorial, mankind has been open. Open to new ideas, open to trade, and open to migration – the three critical ingredients for progress.

On a Side Note…

See another Inside Nexus Nexus Notes Quarterly article that may be of interest to you.

Here we Grow Again!

Topic:
Inside Nexus
Excerpt:
Recently, the Nexus team welcomed our seventh new face to join us since the start of the pandemic in 2020. As growth is an integral part of our

On a Side Note…

See another Investments Nexus Notes Quarterly article that may be of interest to you.

Don’t Worry, Be Happy

Topic:
Investments
Excerpt:
A recent article by David Brooks in The Atlantic magazine argues that, despite the heavy shroud of pessimism that envelopes most of our current

On a Side Note…

See another Pearls of Wisdom Nexus Notes Quarterly article that may be of interest to you.

A Table for None, Please; Working From Home on the Rise

Topic:
Pearls of Wisdom
Excerpt:
Reading is one of the principal occupations in our profession. As we digest a wide range of material, interesting ideas and surprising facts – some

On a Side Note…

See another Tax Planning Nexus Notes Quarterly article that may be of interest to you.

Saving in my Professional Corporation – It’s a Great Idea!

Topic:
Tax Planning
Excerpt:
The ability for professionals in Canada to incorporate their practice has existed for some time. Doctors, dentists, lawyers, accountants, and other

On a Side Note…

See another Wealth Planning Nexus Notes Quarterly article that may be of interest to you.

From The Editor: What’s My Age Again?

Topic:
Wealth Planning, Living to 100
Excerpt:
How old are you? It’s a simple question, one we readily know the answer to, although some of us might not want to talk about it. And why do we know