A&W Capital Research and Investment

Our Purpose

This methodology serves two distinct goals:

• Preservation of shareholder equity
• Grow the purchasing power of shareholder equity above rates of inflation and Commonwealth bond yields.

Macro Economic Analysis

We utilise a "Market Wave" model, inspired by Howard Marks, to map out current pricing trends rather than focusing on a traditional economic clock.

• Positioning on the wave is determined by tracking Reserve Bank of Australia (RBA) Interest Rates and Australian Bureau of Statistics (ABS) Inflation. There is a weak to moderate negative correlation between the RBA Interest Rate and ASX market prices.
• Therefore in the absence of greater forces, an increasing RBA Cash Rate will act as gravity on the ASX dragging down prices. Alternatively, a downtrending RBA Cash Rate will allow market prices to rise.
• Peak wave positions (inflation rising/falling unemployment/stable or rising interest rates) require reducing exposure, while trough positions (inflation low or falling/rising unemployment/falling interest rates) trigger maximising investment exposure.

Industry & Competitive Strategy

We require businesses to be surfing a wave of industry growth. We analyse the industry through three primary lenses:

• Is the Industry Growing? Revenue forecasts must show expansion, avoiding technically obsolete or declining sectors.
• Has the Industry Map Changed? We prefer a predictable landscape with a stable group of major players over a 5-year period.
• Capital Velocity: We measure Invested Capital Turnover against NOPAT Margin to confirm the business is an industry leader in either Cost Leadership or Product Differentiation.

Shortlisting Criteria

To narrow down the companies listed on the ASX to a manageable focus list, a business must clear three initial hurdles:

• The business must be listed for a minimum of 5 years to establish a trackable trend.
• The business must demonstrate nonzero growth in bottom-line earnings.
• The Return on Capital Employed (ROCE) must be greater than 15%.

Financial & Qualitative Analysis

Once shortlisted, a business undergoes rigorous primary financial and secondary qualitative analysis:

• Return Hurdles: Return on Equity (ROE) must exceed the cost of equity, and ROCE must exceed the cost of capital.
• Debt Limits: Total debt must remain strictly below 3x Free Cash Flow to the Firm (FCFF) to ensure solvency.
• Working Capital: The business must efficiently manage cash on hand, inventory turnover, and receivables without bloating provisions.
• Brand Power: B2C and B2B businesses must exhibit strong brand moats, defined by pricing power, a low number of substitutes, and demand inelasticity.
• Management: We prefer long-tenured founders or internally promoted executives who allocate capital toward entrenching their brand rather than diversifying.

Valuation Strategy

We demand a perfect price for a great business.

• Our primary valuation method is the Internal Rate of Return (IROR) model.
• We target a hurdle rate of 15% Compound Annual Growth Rate (CAGR).
• Our models utilise a two-stage growth projection: a 3-year Super Normal Growth Period (SNGP) followed by a Normal Growth Rate pegged to the 10-year Commonwealth bond yield.
• We prefer dividend-paying stocks, as they decrease reliance on perfectly predicting the SNGP.

Capital Allocation

Our philosophy is simple: Starve the weeds and fertilise the flowers. We cap any single stock at a maximum of 8% of total capital at cost to mitigate company-killing risks.

The Trading Arm

The A&W Trading Arm captures opportunities in businesses we want to own but are fundamentally overvalued, as well as capitalising on large macroeconomic events.

• Trading Overvalued Businesses: We trade exceptional, high-growth businesses (often monopolies/duopolies) that are too expensive for long-term fundamental investment but are actively surfing a wave.
• Macro Events: We trade tight-probability pathways triggered by global catalysts (e.g., energy shifts, data centre buildouts).
• System Tactics: We employ a high-turnover trading system that takes quick profits as a stock rises, paired with a long-dated exit strategy to ride out systemic market drawdowns.