Some investors buy stocks at their all-time highs, depending on the market’s confirmation of a company’s performance. Many times, however, those prices come with elevated valuations. I prefer to shop a bit smarter, waiting for high-quality companies to go “on sale”, or at least closer to a reasonable price. Market often pullback due to an increased perception of risk creating opportunities for quality companies for long-term investors.
That’s where having a shopping list of quality companies comes in. Think of it like knowing which brands you trust before hitting the clearance rack—it saves you from impulse buys and helps you focus on businesses built to last. My list is reserved for companies with predictable business models, consistent profitability, and a sustainable competitive advantage that can weather economic storms.
Today, I’m highlighting three such companies—Marriott International (MAR), Moody’s Corporation (MCO), and Home Depot Inc. (HD). These stocks check all the boxes, and at the right price, will offer consistent, long-term returns to a portfolio.
Marriott International (MAR): Expanding a Global Hospitality Giant
Overview and Business Model: Marriott International is a dominant global force in the hospitality industry, with over 8,500 properties across 138 countries. The company’s portfolio includes 30 brands, ranging from luxury offerings like The Ritz-Carlton and St. Regis to more economical options like Courtyard and Fairfield Inn. But here is the brilliance of Marriott’s business model: Marriott doesn’t own most of these hotels. Its asset-light model focuses on managing and franchising properties. Add in the Marriott Bonvoy loyalty program with its 200 million members that drives bookings and pricing power, and you have got a company that has positioned itself for stability even during difficult economic times.
Why Marriott is High Quality: Marriott’s asset-light approach means that the company can expand rapidly without taking on the capital expenditure burdens that typically accompany hotel ownership. By collecting fees from franchisees and management contracts, Marriott generates predictable cash flows. Couple that with the Marriott Bonvoy loyalty program, which has grown approximately 15% annually and which management has credited with driving consistent bookings, and you have a recipe for one resilient hospitality company.
Profitability Metrics: The impact of Marriott’s business model can be seen in its level of profitability. The company’s operating margin has expanded from 6.8% in 2014 to 16.4% in 2023 with EBITDA margins increased from 48%% in 2014 to 73% over the same period. As profitability expands and investment remains low, Marriott’s return on invested capital (ROIC) has held strong around 14-16%. As the company expands in this way, we should expect to see returns expand as well.
A Quick Look At Valuation: Here is where things get tricky: Marriott’s stock price is hovering around all time highs, trading at 20x 2024 EV/EBITDA, well above its historical mid-teens range. At these levels, the market appears to have fully priced in the expected growth as well as the quality of the company. In an effort to gauge a more reasonable price for this name, if we use the midpoint of Marriott’s 2024 EBITDA guidance of $4.945 billion and put a 16 multiple on it, we reach an equity value of $225 per share—20% lower than the current stock price. While that may be more than we can ask for a quality company like Marriott, pullbacks in the company will likely come from a bout with economic uncertainty that could give us an opportunity at a more reasonable valuation.
Moody’s Corporation (MCO): A Dominant Force in Risk Assessment
Overview and Business Model: Moody’s Corporation is a global leader in financial ratings, risk assessment, and analytics. The company operates through two main business segments: Moody’s Investors Service (MIS), which provides credit ratings, and Moody’s Analytics (MA), which offers subscription-based risk solutions. Moody’s enjoys a near-monopolistic position in the credit ratings market (alongside S&P Global).
Why Moody’s is High Quality: Moody’s strong market position, particularly in credit ratings business (MIS), allows it to generate significant revenue with minimal capital investment. While dependent on bond issuance, Moody’s MIS segment has diversified its ratings coverage expanding into new asset classes and geographies to drive growth. Revenue predictability comes from Moody’s Analytics segments operating a recurring revenue model that generates 95% of its revenue from subscriptions. This type of revenue model has and will continue to provide stability and consistent growth for Moody’s seeing Annualized Recurring Revenue (ARR) growing 10% in 2023 reaching $3.1 billion. Growth in the MA segment will be driven by its ability to expand into emerging areas such as climate risk, ESG, cybersecurity, regulatory compliance, and emerging markets.
Profitability Metrics: Over the past decade, Moody’s EBITDA and operating margins have remained consistent, currently at 48% and 41%, respectively. The company’s ROIC is currently around 19%, a decline from levels of 24–25% during most of the past 10 years mostly due to acquisitions to diversify the analytics segment. Still, high levels of profitability speak to Moody’s efficient operational structure, particularly within the Moody’s Analytics segment, which has evolved to offer more products and services on a subscription basis, which ensures consistent, repeatable revenue over time.
A Quick Look At Valuation: At 27x 2024 EV/EBITDA, Moody’s is not cheap. Over the past 10 years, Moody’s has traded around 20x EV/EBITDA. However, given the consistent profitability and earnings growth, I do believe this company deserves to trade for a premium valuation. While I would be interested in buying this company on any pull back, I would be excited to get this name closer to 24x 2024 EV/EBITDA, or below $425 which is a 12% decline from today’s price.
Home Depot Inc. (HD): Leading the Home Improvement Industry
Overview and Business Model: Home Depot Inc. is the largest home improvement retailer in the U.S. With over 2,300 stores located primarily in North America, the company serves both DIY (Do-It-Yourself) customers and Pro (professional contractors). Two key strategies for Home Depot are to create a seamless shopping experience through interconnected retail, allowing customers to order online and pick up in-store, or have items delivered, and driving the Pros segment growth through initiatives like the Home Depot Pro Loyalty program.
Why Home Depot is High Quality: Home Depot’s massive scale allows it to leverage its size for cost advantages and better supplier relationships. Consistent investment in its supply chain has streamlined inventory management and ensured product availability, making Home Depot a dependable partner for professionals. The acquisition of SRS Distribution further expanded Home Depot’s reach enhancing its offerings for this key segment. On top of this, management has touted the success of its e-commerce strategy involving initiatives like “Buy Online, Pick-Up In Store” (BOPIS) and “Buy Online, Deliver From Store” (BODFS) which have seamlessly integrated its physical and digital presence, driving both customer satisfaction and incremental sales.
Profitability Metrics: Home Depot’s profitability has shown resilience despite a moderation in growth post-pandemic. The company’s gross margins have remained consistent over the past 5 years settling at 33.4% for fiscal 2023. The operating and EBITDA margins for the same year were 15.3% and 17.2%, respectively. While we have seen some pressure on margins in 2024 due to higher interest rates, inflation and moderating consumer demand, Home Depot profitability has remained resilient. These pressures have caused declines in returns on invested capital (ROIC), but still remain healthy at around 24% for fiscal year 2024. It appears that Home Depot’s profitability is normalizing post-pandemic, but still representative of management’s effective capital allocation towards store improvements, technology, and strategic acquisitions.
A Quick Look At Valuation: Trading at 19x 2024 EV/EBITDA, Home Depot sits at the high end of its historical range of 14x to 18x. Despite wavering in growth and margins following pandemic led distortions, we can attribute Home Depot’s premium valuation to the qualities mentioned. Still, if we take the midpoint of its historic range of 16x, and use 2024 EBITDA guidance of $24.77 billion, we reach an equity value of $335 per share, a 18% decline from today’s price. While a price closer to this level would represent a wonderful opportunity, barring an economic shock, the market appears willing to give this stalwart time to return to growth.
Final Thoughts
Marriott International, Moody’s Corporation, and Home Depot Inc. are all high-quality companies that exhibit the qualities I prioritize: strong, consistent, and predictable business models, robust profitability metrics, and sustainable competitive advantages. Marriott’s asset-light model and loyalty program, Moody’s near-monopoly in the credit ratings market combined with a subscription-based analytics segment, and Home Depot’s scale and supply chain efficiency all exemplify these qualities.
While each of these companies is currently trading at a premium valuation, they have demonstrated an ability to deliver consistent returns to shareholders and navigate economic cycles underscoring why these companies have earned a spot on my shopping list.
