Title: Best Buys: August 2026 Show: Compounding Quality (Substack, paid post — compoundingquality.net) Guest: Pieter Slegers / Team Compounding Quality (byline "Compounding Quality", signed "Team Compounding Quality") Date: 2026-08-30 URL: https://www.compoundingquality.net/p/best-buys-august-2026 Length: written post — no timestamps Note: Paid-subscriber post captured via Stephen's logged-in session. Body text verbatim; UI chrome removed. Charts noted inline as [Image — ...] with the source line the post prints beneath each. The two best/worst-performer cards are published as images and are transcribed below as [Table image — ...] blocks; note they are headed "July 2026" although this is the August issue. No valuation table is published in this issue — only the Watsco spotlight carries a target ($20bn market value, "an upside potential of 56%"), and none of the five ranked Best Buys carries a fair value, forward PE or expected return.
Hi Partner
It's time for the Best Best Buys of the month today.
These are our favorite stocks that aren't in Our Portfolio yet.
In other words: these stocks are the most likely to be added to the Portfolio.
Past month
In the past month, the S&P 500 rose by +3.6%:
[Image — S&P 500 past month, Source: Fiscal.ai]
Investors are 'Neutral' today according to the Fear & Greed Index:
[Image — Fear & Greed Index: Neutral]
Best & Worst Performers
This overview shows you the best and worst performers in our investable universe.
Worst performers
The cheaper we can buy great companies, the better.
Here are the worst performers of the past month:
[Table image — "Performance — Worst Performers July 2026": Walker & Dunlop -19.9% Judges Scientific -19.6% Watsco -18.7% Rollins -17.0% Dick's Sprtng. Goods -15.9%]
Best performers
These stocks did well over the past month:
[Table image — "Performance — Best Performers July 2026": Kainos Group +67.7% Paycom Software +64.7% Gartner +47.0 Marketaxess +42.4% Mips AB +38.6%]
Spotlight: Watsco ($WSO)
How does the company make money?
Watsco is the largest distributor of HVAC/R (heating, ventilation, air conditioning, and refrigeration) equipment, parts, and supplies in North America.
It's the distribution link between major equipment manufacturers (OEMs) and over 120,000 independent contractors and technicians.
Watsco is active in three segments:
HVAC Equipment: Residential central air conditioners, heat pumps, furnaces, and commercial heating and cooling systems.
Other HVAC Products: Everything a contractor needs to install, maintain, or repair a system. It covers replacement parts (like motors, coils, and compressors), thermostats, ductwork, copper tubing, refrigerants, insulation, tape, and tools.
Commercial Refrigeration: Walk-in coolers, freezers, ice machines, and supermarket refrigeration systems used primarily by restaurants, grocery stores, and the food/beverage industry.
The revenue split looks as follows:
[Image — revenue split by segment, Source: Fiscal.ai]
What's interesting?
70%-80% of sales are emergency replacements & repairs.
This means these sales are at least somewhat recurring.
When something breaks down, the most important thing for contractors is how easily and quickly they can get the parts, not what they cost.
[Image — Source: Watsco Investor Relations]
One of Watsco's biggest advantages is its digital platforms.
They help contractors:
Find and order the right parts
Create quotes for customers
Complete more jobs
This helps contractors increase their profits.
[Image — Source: Watsco Investor Relations]
Today, e-commerce sales generate one third of their total revenue:
[Image — Source: Watsco Investor Relations]
More Room to Grow
Beyond its e-commerce platforms, Watsco has several other advantages.
Watsco is a large serial acquirer active in a highly fragmented industry:
They sell about 1 in 5 residential systems.
There are 2,000+ regional distributors in North America.
Watsco isn't even active in all 50 states yet
Management sees Watsco as a business that's still being built.
I think they're right.
Fundamentals
The fundamentals of Watsco look very strong:
Asset-Light: Watsco requires almost no capital to operate
Balance Sheet: They have very little debt
ROIC: Consistently generates 15%+ Return on Invested Capital
Value creation: The stock is up nearly 12,000% since 1990.
[Image — long-run share price, Source: Fiscal.ai]
At the same time, Watsco is down over 45% from its peak:
[Image — drawdown from peak, Source: Fiscal.ai]
The market doesn't like that revenue and net income have fallen over the past few years:
[Image — revenue and net income, Source: Fiscal.ai]
However, this isn't a problem with the underlying business.
Instead, three temporary headwinds hit at the same time:
COVID Pull-Forward: High demand during the pandemic made sales unusually strong. Dealers also ordered too much inventory and had to work through it when demand returned to normal.
A2L Refrigerant Transition: The switch to new refrigerants disrupted supply chains and temporarily boosted demand.
OEM Pricing Normalization: Manufacturers raised prices sharply after the pandemic. This temporarily boosted Watsco's sales and profit margins.
Management has long-term targets of $10 billion in revenue and 30% gross margins.
If we assume a 8% Net Profit Margin is realistic, this would translate into $800 million in Net Income.
At a FWD PE of 25x, this means the company should be worth $20 billion ($800 million x 25) by then.
That's an upside potential of 56% compared to the current stock price.
Best Buys August 2026
Let's now dive into our five favorite buys for the month.
These are our favorite stocks that aren't in Our Portfolio today.
In other words: these stocks are the most likely to be added to the Portfolio right now.
As a reminder, you have access to Our Portfolio here.
5. Hermès International ($RMS.PA)
How does the company make money?
Hermès designs, manufactures, and sells ultra-luxury goods across 16 product métiers.
Think about handcrafted leather goods (such as the Birkin and Kelly bags), silk scarves, ready-to-wear fashion, perfumes, and watches.
[Image — Source: Hermes Investor Relations]
Hermès runs on exclusivity.
They intentionally make fewer products than customers want.
This means they don't need to offer discounts, sell through outlets, or hold excess inventory.
As a result the company operates at very high margins.
[Image — margins, Source: Fiscal.ai]
Demand for Hermès bags is so high that pre-owned bags often sell for more than new ones.
Would you pay $42.700 for a handbag?!
[Image — Source: Farfetch]
Another thing we love?
The founding family controls more than 65% of the equity.
This gives them serious skin-in-the game.
It's a strong incentive to protect the brand equity that has been built over generations.
[Image — ownership, Source: Fiscal.ai]
In 2026, Revenue and Net Income has slowed a little bit:
[Image — revenue and net income, Source: Fiscal.ai]
As a result, the stock is down nearly 30%:
[Image — share price, Source: Fiscal.ai]
But much of the slower growth comes from currency headwinds.
On a constant-currency basis, the underlying business is still growing.
[Image — constant-currency growth, Source: Hermes Investor Relations]
To summarize:
Hermès is one of the strongest brands in the world
It's family-run
Incredibly profitable
After years of being very expensive, the valuation e is finally coming down to more reasonable levels
4. Canadian National Railway ($CNI / $CNR.TO)
How does the company make money?
Canadian National Railway operates a 19,500-mile transcontinental rail network. It is the only railroad in North America connecting the Atlantic, Pacific, and Gulf coasts.
[Image — network map, Source: CNR Investor Relations]
The most interesting thing? Railways are natural monopolies.
Because of the cost of land, zoning restrictions, and environmental permits, no new competitor will ever be built.
Trains are also the cheapest way to move heavy freight.
They use 4x less fuel than shipping by truck, which gives them a huge cost advantage.
[Image — Source: Rail Logistics]
If you need to move heavy goods long distances by land, you'll use trains whenever possible.
That's why Canadian National Railway has been able to raise freight rates at or above inflation through different economic cycles.
However, freight volumes have been falling for the past few years.
[Image — Source: Cass Information Systems]
Luckily, CNR has been able to keep making their railroad more efficient.
[Image — Source: CNR Investor Relations]
That's why management just raised guidance on their Q2 earnings call.
For long-term investors, this might be an interesting time to look at CNR.
The company will seriously benefit from any improvement in North American freight volumes.
Management has historically returned a lot of cash to shareholders.
This through both dividends and buybacks.
[Image — dividends and buybacks, Source: Fiscal.ai]
Now let's dive into the top 3.
3. Moody's Corporation ($MCO)
How does the company make money?
Moody's provides credit ratings and research on debt issuances. They also operate as enterprise SaaS platforms for risk management, financial intelligence, and compliance data.
Moody's operates in an Oligopoly in the credit rating market.
[Image — Source: Genuine Impact]
Listed companies are basically obliged to have a credit rating when they want to issue debt.
You need to have a rating from at least 2 of the 3 big players in this industry: Moody's, S&P Global and Fitch.
This lets these companies function as a toll bridge in the corporate debt markets.
The result? A very high profitability.
[Image — margins, Source: Fiscal.ai]
In general, the bond market can be volatile.
Sometimes a lot of companies are issuing debt, sometimes not many are.
Moody's Analytics creates a steady, recurring software revenue stream.
This helps to reduce the volatility.
[Image — revenue split, Source: Fiscal.ai]
In the past year, the stock was relatively flat:
[Image — share price, Source: Fiscal.ai]
In the meantime revenue and EPS kept growing:
[Image — revenue and EPS, Source: Fiscal.ai]
As a result, Moody's now trades at its most attractive valuation level since 2020:
[Image — valuation history, Source: Fiscal.ai]
2. TransDigm Group ($TDG)
How does the company make money?
TransDigm is active in the aerospace & defense industry.
They manufacture highly engineered aerospace components for commercial and military aircraft. This includes ignition systems, pumps, valves, and specialized cockpit hardware.
Transdigm is active in a quasi monopoly for most of what it sells.
For 80% of their products, they are the only certified manufacturer.
[Image — Source: TransDigm Investor Relations]
Another beautiful thing?
The vast majority of TransDigm's sales are aftermarket.
Most aircrafts stay in service for 25-30+ years.
Selling aftermarket replacement parts is much more profitable than selling the initial product.
That's exactly why Transdigm is so profitable.
[Image — margins, Source: Fiscal.ai]
You can look at Transdigm as a serial acquirer with a simple playbook:
Acquire Monopoly Parts: Buy niche aerospace suppliers that make components nobody else can produce
Cut Costs & Improve Efficiency: TransDigm then cuts costs, links executive pay to unit profitability, and streamlines operations.
Price for Value: Airlines cannot legally fly a $100M plane without certified parts. This allows TransDigm to raise prices regularly and price its parts based on their value to keeping planes in the air.
They've done this hundreds of times, with hundreds of companies.
[Image — acquisition history, Source: TransDigm Investor Relations]
And there are hundreds more companies out there for TransDigm to continue buying.
Global passenger air traffic remains near record levels, and it's not projected to slow down anytime soon.
[Image — Source: Airports Council International]
At the same time, aircraft OEMs like Boeing and Airbus have huge order backlogs.
This forces airlines to keep older aircraft flying longer, resulting in high-margin replacement part sales for TransDigm.
It's a very strong business that's projected to keep growing at attractive rates.
[Image — Source: Fiscal.ai]
1. Mastercard ($MA)
How does the company make money?
Mastercard runs a network that connects consumers, merchants, and banks worldwide. They make money by charging a tiny fee on every single transaction that runs through their network.
Mastercard operates one of the most profitable and asset-light business models in the world.
[Image — Source: Fiscal.ai]
It operates in a functional duopoly alongside Visa, with very strong network effects.
Merchants accept Mastercard because all consumers carry it
Consumers carry Mastercard because all merchants accept it
Mastercard has a very strong moat, but it's also very profitable.
As the infrastructure is already in place, every new transaction costs almost nothing to process.
That gives them huge margins.
Just look at this chart:
[Image — margins, Source: Fiscal.ai]
Mastercard's traditional payment network is a great business.
But the company also sells cybersecurity, fraud prevention, and data analytics to the banks and merchants on its network.
These value-added services are growing rapidly and are becoming an increasingly important part of Mastercard's revenue.
[Image — value-added services, Source: Fiscal.ai]
As you can see here, Mastercard is a clear compounding machine:
[Image — long-run compounding, Source: Fiscal.ai]
Conclusion
Here's an overview of the 5 Best Buys of this month:
Hermès ($RMS.PA): An ultra-luxury house with extreme scarcity, zero discounting, and high pricing power.
Canadian National Railway ($CNI): An irreplaceable rail monopoly with low-cost cost advantages and inflation-plus pricing power.
Moody's ($MCO): A credit rating duopoly and financial toll booth with recurring software revenue.
TransDigm ($TDG): A sole-source aerospace component monopoly generating high profits on selling necessary replacement parts.
Mastercard ($MA): An asset-light global payments duopoly with unbeatable network effects, high operating margins, and double-digit value-add growth.
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Used sources Interactive Brokers: Portfolio data and executing all transactions Fiscal.ai: Financial data
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