How do you know if you have found a business that has all the qualities of a ‘reinvestment moat’ firm? According to Connor Leonard of Investors Management Corporation, the first step is to find a business that is easy to understand. Investors Management Corporation (IMC) flies under the radar of most investors and Connor did his best to try and introduce the company and what it does at last month’s Valuex Vail conference.

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Founded in 1971 with $50,000 capital (the only equity capital ever invested) IMC set out to become a casual dining restaurant chain. Today the business has grown into America’s #1 buffet and grill with $1.7 billion in systemwide sales with 85% of outlets franchised. Cash generated has been reinvested in seven other subsidiary companies with the goal of becoming a responsible long-term owner of a collection of good businesses as inspired by Berkshire Hathaway.

Alongside these subsidiary businesses, Connor runs a public securities portfolio for Investors Management Corporation with the goal of investing with a private market mentality in public companies. The portfolio can allocate 25% of assets to the top holding if the conviction is high.

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Investors Management Corporation And Moats

Connor and team are on the lookout for high-quality businesses with ‘reinvestment moats’. In the presentation, Connor notes that most of today’s moat companies have so-called ‘legacy moats’ where the company is earning high returns on prior invested capital but does not have opportunities to deploy incremental capital at similar rates. ‘Reinvestment moats’ on the other hand are companies that have all the advantages of a legacy moat, plus the opportunity to deploy incremental capital at high rates. Coca-Cola and Hershey’s are given as examples of legacy moats. Visa, Moody’s and Verisign are cited as being ‘capital light compounders.'

Finding the best ‘reinvestment moats’ requires some extra work. In his presentation Connor laid out the simple checklist he has compiled for this task:

  1. First of all, as mentioned above, an understandable business model is essential.
  2. Second, the product or service offered must benefit the entire ecosystem, in other words, does the company make life easier for all stakeholders (suppliers, customers, and managers).
  3. Third, does the company have a sustainable competitive advantage?
  4. Fourth, does the company have a long run way for growth?
  5. As the company grows, will its moat expand or contract?
  6. Does management have a long-term focus, preferably, are founders invested alongside ordinary shareholders?
  7. Does your analysis have a clear edge over the rest of the market?
  8. Is the business underfollowed and why?
  9. Is the valuation reasonable?
  10. Are you willing to act with conviction?

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