When Compounders Stop Compounding

A moat can protect economics. It can’t guarantee a return.

Danaher’s recent earnings print, on the surface, looked respectable. Revenue grew, adjusted earnings increased and management raised its full-year earnings outlook. But it didn’t seem to matter. The shares had their worst one-day decline in more than two decades. Another “compounder” taken out behind the woodshed.

Why should investors pay attention to this? Well we think it’s part of a pattern that’s happening more frequently, especially over the last few years. After watching the reaction to Danaher’s print, we found ourselves revisiting some of the classic investing principles especially around moats. Investors have always been fascinated with them but it’s worth looking closer at their relationship to stock returns. Specifically, our thought is that moats can protect a business’s existing economics, but only a durable reinvestment runway purchased at a reasonable price can really compound the stock.