In investing, we hear a lot of discussion about buying high-quality businesses. Warren Buffett, of course, has made quality a true staple of value investing. What better way to get value than to buy a solid business that can continue to grow cash flow and increase intrinsic value over time? These types of businesses become compounding machines, and they can often create the most desirable long-term investment returns.
Just look at one of Buffett's favorite investments today, Wells Fargo (WFC). At the height of the financial crisis, shares of Wells fell below $10. Fast-forward five years, and the stock is trading around $52. If that isn't enough to make you drool, consider that Wells today pays a dividend of $1.40 per share. At $10, your yield would have been 14% per annum.
But most businesses aren't born as high-quality entities. Occasionally there are some, such as Google (GOOG), that create an immediately outstanding product or service. But other top-notch businesses today, such as Chipotle (CMG), American Express (AXP) and even Coca-Cola (KO), weren't such obvious winners in the beginning. Another example, of course, is Apple (AAPL) during the iPod and iPhone 1 days. For these kinds of high-quality operations, it's the period between obscurity and recognition that exceptional shareholder value is unlocked.
CalAmp (CAMP) is one of those names. With market capitalization of $700 million, CalAmp is a provider of wireless communication products and services. Over the past three years, revenue has climbed from $140 million to more than $230 million, while operating income has gone from $7 million to $18 million. In the next two years, revenue is expected to exceed $300 million, while operating income could grow beyond $30 million.
For what it's worth, analysts see adjusted earnings per share growing to more than $1.20 per share by the end of fiscal 2016, up from an adjusted $0.77 in fiscal 2014, which ended in February. The shares, which climbed to above $30 earlier this year, have fallen back to $20 today.
United Natural Foods (UNFI) has clearly established itself as the preeminent distributor of natural and organic foods. The current price of $65 values the company at $3.2 billion, or 27x trailing earnings. United Natural is the premier supplier to Whole Foods -- both rely on one another immensely. So, as Whole Foods grows, so will United Natural.
The key for United Natural, which serves the hundreds of smaller U.S. regional natural foods chains, lies in continuing to expand its network. As the natural-food industry continues to grow, United Natural stands to become the Sysco (SYY) of that industry. I would pay close attention to this stock and its price level.
I'm not sure if I've uncovered anything like the next Coke or Chipotle, but the key point is larger than that. Wall Street loves quality, but Mr. Market is unwilling to pay up until after it has achieved recognition. The investor who owns before this will be set up to reap the biggest gains.