Three Questions for Investing in Non-Tech Stocks

I’ve spent a lot of time making the case for technology stocks, so it’s a bit ironic that my whole investment journey started with HEICO, a company that’s anything but digital. It was HEICO’s combination of a low-cost advantage and a tiny slice of a massive market that really opened my eyes. It taught me to hunt for businesses with both a competitive moat and the potential for exponential growth. As it turned out, when I applied this lens to the market in the early 2000s, about 90% of the companies that fit were in tech. But that other 10% was fascinating.

Today, I own stakes in companies that help people fly, paint their homes, and get access to credit. This is about how you can find similar opportunities. For anyone interested in , the core template remains the same whether you’re looking at the old or new economy:

• A small share of a big market, plus a durable competitive edge.
• A management team with an owner's mindset that knows how to create value.
• A price below twenty times its earnings power, giving you at least a 5% earnings yield.

When you’re looking at non-tech companies, though, you have to add a few more layers to your analysis. Digital companies are constantly making things faster, better, and cheaper, so you have to assume that every traditional business is in tech’s crosshairs. It’s a “guilty until proven innocent” approach, but it’s a smart one for in legacy industries. Here are the three questions I use to sort the survivors from the vulnerable, along with three companies that pass the test.

1. Is the Company's Product Tech-Proof?

This is often the best place to start—with a business that’s naturally resistant to digital disruption. All of my non-tech holdings have this quality, but none more so than Sherwin-Williams. You simply can’t digitize paint.

There’s a deep-seated human desire to coat our walls, whether for decoration or protection. Early paints were simple concoctions of oil, water, seashells, and berries. Over time, the craft of making durable coatings became a protected trade, with English craftsmen forming a guild back in 1502. After a slow start in Puritanical America, Henry Sherwin and Edward Williams founded their company in 1866 and introduced the first ready-to-use paint. As the world industrialized, “paint” became “coatings” for cars, ships, and planes, and Sherwin-Williams was at the forefront, patenting its innovations and investing in R&D to widen its lead.

After 150 years of innovation and brand-building, what truly sets Sherwin-Williams apart is its retail footprint. The company operates nearly 5,000 of its own stores. Its closest competitor, PPG, has about 1,000. This network is a massive competitive advantage because it allows Sherwin-Williams to be a daily presence in the lives of professional painters. The company built this moat by asking what its customers truly care about. For a painter, 80% of costs are labor and only 20% is paint. Time is literally money.

Sherwin-Williams focused on this reality. They rolled out so many stores that most painters drive past one on the way to a job. They offer curbside pickup so painters don’t even have to leave their trucks, and a fleet of 3,000 delivery trucks makes constant runs to jobsites. While PPG owns its stores, it lacks the density to be ubiquitous. And while Benjamin Moore has many locations, they are independently owned and don’t operate as a cohesive unit. Only Sherwin-Williams can service national accounts, launch a unified brand campaign, and offer a mobile app that lets a painter order supplies at night for pickup the next morning.

This edge is growing. Sherwin adds nearly 100 new stores a year, while PPG barely hits double digits. It’s no surprise Sherwin’s North American paint sales are growing at 6-7% annually, double the rate of its competition. The company still only has about a 10% share of the massive and fragmented $150 billion global coatings market. On top of that, its management team thinks like owners. They proved this in 2017 with the brilliant acquisition of Valspar, using 100% debt. They knew their cash flow was strong enough to pay down the debt over time without diluting shareholder value.

2. Is Technology Making a Great Business Even Better?

If it weren't founded in 1899, you could easily mistake Equifax for a tech company. Its product—consumer credit information—is just data. Many people know their FICO score, but few realize that Equifax is one of just three companies that provides the raw data behind it.

Founded by two brothers who compiled credit histories in a ledger called , the business model has fundamentally stayed the same. Banks and other lenders give Equifax and its two rivals, TransUnion and Experian, data on their customers for free. The bureaus analyze this data and then sell it back, often to the same institutions. It’s an incredible business model with high barriers to entry; banks are used to working with the big three and have no incentive to give their valuable data to a new player.

The business also has digital economics, where the profit margin on each additional data sale approaches 100%. So far, it’s also been surprisingly tech-proof. Fintech startups have tried to predict creditworthiness using social media profiles, but it’s not as reliable as an actual payment history. And while consumers are sensitive about their data, most want it shared so they can get a mortgage or a car loan.

In 2017, however, Equifax suffered a catastrophic data breach, where hackers stole the credit data of nearly 150 million Americans. The stock plunged, and I saw an opportunity. As terrible as the breach was, I believed the market was overreacting. Fines and settlements, while painful, are often just a cost of doing business. The payment is a one-time event, but the great business underneath carries on. A few years later, Equifax had paid its fines, hired new IT leadership, and brought in a new CEO who used the crisis to accelerate a move into the cloud. The company is now spending around $1.5 billion to migrate its data to Google's platform. This move hurts short-term earnings, but it will dramatically increase its long-term earnings power, a trade-off that is a cornerstone of smart . It’s this kind of strategic thinking that can turn an investment into one of the for a shareholder.

Interestingly, it turned out the hackers weren't thieves but spies. In 2020, the U.S. Department of Justice indicted four Chinese military officers for the crime, revealing they were searching for blackmail material on high-level officials, not consumer fraud.

3. Does the Business Serve Those Left Behind?

Dollar General is not a store where everything costs a dollar. It’s a modern general store selling staples like bread and eggs in small, convenient locations, primarily serving lower-income customers in urban and rural areas. It’s a phenomenal business that is often misunderstood.

The corner store concept is tech-proof. No online service, not even Instacart, can beat the convenience of stopping in for a few items on the way home from work. More importantly, its customers often can't afford Amazon Prime's $139 annual fee. The typical Dollar General shopper has an annual income about half that of the average American. The stores prominently display signs accepting federal food assistance benefits.

Critics sometimes fault the company for stocking processed snacks over fresh produce, but they miss the bigger picture. Dollar General isn’t creating food deserts; it’s filling a void left when a Target or Kroger closes down. For many of these communities, the alternative isn’t a Whole Foods; it’s nothing. For people looking for , investing in companies that serve essential needs is a key strategy.

Despite being the only option for many, Dollar General doesn’t gouge its customers. It aims to keep its prices within 3% to 5% of Walmart’s—an impressive feat given its much smaller buying power. Its prices are roughly 40% lower than at drugstore chains like CVS and Walgreens. This commitment to convenience and price has built incredible trust, leading to 31 straight years of growth in same-store sales.

Sadly, the demand for its stores is growing as the economic divide in the U.S. widens. Five years ago, the company estimated the market could support 10,000 more dollar stores. Today, even after thousands have been built, they believe the country can support another 12,000. As the digital divide grows, so does the need for Dollar General, making it one of those for investors who understand the underlying economic trends.