By now, you've probably read a million articles about Warren Buffett stepping down. Yes, the great man has hit the headlines again. No, this won't be one of those articles. This one is about chocolate, and it ends with two ASX stocks you might want to own.
On my way back from a recent trip to the US, I brought home a few boxes of See's Candies for friends and family. I got the peanut brittle, which reminds me more of Charlie Munger than Warren, but that's beside the point.
Source: Me. See's Candies gift I bought for friends and family.
It prompted me to re-read the 2007 Berkshire Hathaway shareholder letter, where Buffett explained why See's Candies was one of his all-time favourite investments.
The short version? It was boring, capital-light, and ridiculously profitable.
Armed with this filter, I went looking for ASX companies that fit the mould.
Here are two that stand out for me:
The Proven One: Supply Network Ltd (ASX: SNL)
Supply Networks sells spare parts for trucks and buses. Not really exciting stuff, but that's the point.
Over the past five years, Supply Networks quietly delivered a +1,054% return plus a dividend to boot! This was driven by consistently delivering strong earnings growth and exceptional capital discipline.
Here's what makes Supply Networks similar to See's Candies:
- Repeat customers: Truck and bus fleets rely on Supply Network's product range and services, just like how chocolate lovers keep going back for more See's Candies.
- Highly profitable: Return on equity has exceeded 30% in each of the last 3 years, and earnings per share have consistently increased in each of the last 5 years.
- Boring but moaty: What makes a spare-parts seller so consistently profitable and at such high margins? Competitive advantage. Supply network has great distribution through its network of branches that operate under its Multispares brand. This gives it familiarity and builds customer habits in the same way that going to Woolies, Coles, or Aldi is like for grocery shoppers.
One way, however, that Supply Networks is NOT like See's Candies is that it holds a lot of inventory. At last count, it had $115m of inventory, which is a large (but necessary) number for a company with only $33m of 2024 profit and $16.5m of net cash from operating activities.
See's Candies, on the other hand, keeps minimal inventories due to short production and distribution cycles.
The Emerging One: RPM Global Holdings Ltd (ASX: RUL)
RPM builds enterprise software for mining companies. These tools help with mine planning, asset optimisation, and operational decision-making.
It's been around for years, initially as a professional services provider, but it's been transforming into a high-margin software business with a growing stream of subscription revenue.
Here's why it reminds me of See's Candies:
- Quietly dominating: How many mining-specific software companies have you heard of? This is not an industry that generalists building software companies like to target, so RPM Global is very much off the beaten path, but it's making the most of it.
- Repeat customers: Just like Supply Networks before, RPM Global's subscriptions business earns its income from repeat customers who use its services over and over again.
- Consistent execution: RPM Global's management laid out the plan years ago to transform its operations into a mainly subscription software business. Credit where it's due: They have consistently executed that plan, and I think that will continue.
However, it's worth pointing out that RPM Global still has a lot to prove, and it's different from See's Candies in other ways, too. For example, the company is reinvesting a lot of cash to grow and develop its subscription software business, whereas See's Candies had limited reinvestment opportunities and would often return capital to its shareholders.
The RPM Global share price is up 177% over the last 5 years and I think it can keep going. It has all the ingredients, and it's certainly one that I'm watching closely.
Final thoughts: Sweet lessons for smart investors
Buffett's love for See's isn't about chocolate (though I'm sure he loves that too!). It's about business.
You don't always need the highest-growth business with an engaging narrative. Sometimes, the best businesses are the ones doing essential things, quietly, for years, while compounding returns under the radar.
Supply Network has already proven it fits the mould. I think RPM Global may be next. Just like Buffett, I'll take a few sweet compounders on the ASX any day.
