>>To the fund's managers, high quality means companies that are industry leaders with high readings in several metrics: recurring revenue, return on invested capital, sustainable free cash flow and pricing power.
Those tend to translate into sustainable long-term growth rates, says Steven Barry, who runs the fund with David Shell.
And buying a stock at an attractive valuation is important, Barry says. It gives the value of a company's earnings more room to grow. "When we buy growth, we can use compounding to create wealth," Barry said.
A low buy price also helps cushion the fund from market volatility.
One example was Equinix (NasdaqGS:EQIX - News), which the fund bought several times last year, including around its Nov. 21 low of 32.72. Shares then traded at less than half their current multiple of around 10 to 12 times what the fund calls sustainable free cash flow.
The company, a top holding as of the fund's latest disclosure, provides global data-center services. Equinix was among companies that investors sold off as the credit crisis of late 2008 unfolded. Investors were wary of companies they saw as dependent on heavy borrowing. In Equinix's case, Barry and Shell disagreed with that rejection.
Global Growth
Equinix was using leverage to finance expansion of its data centers globally, Barry says. And as a leader in its field, Equinix's facilities were generating strong free cash flow. Many of its customers had contracts with price escalators.
The company has posted two quarters of accelerating triple-digit EPS growth. The stock is up 36% so far this year.
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