‘Basic and boring’ : NAOS’ CIO Sebastian Evans shares his investment thesis and stock tips
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Sebastian Evans believes that backing people who’ve shown a track record of successfully growing a business over the long term is the best way to approach stock investments.
The chief investment officer and managing director of Sydney-based NAOS Asset Management added that his investment philosophy is fairly basic, and even somewhat boring.
“It’s all about finding people that you can trust who are very good at what they do,” Evans told Stockhead.
“We provide them with patient capital, and we wait for them to grow over the long term. We’re not traders.”
Unlike other fund managers, NAOS only holds 7 to 15 stocks in its portfolio, and usually takes majority stake of between 20% to 30% of each stock.
“And because we are a LIC (listed investment company), we don’t have to follow an index and can invest based on potential ROI, unlike other fundies,” he explained.
NAOS currently has $400m invested across three LICs traded on the ASX: The NAOS Emerging Opportunities LIC (ASX:NCC), the NAOS Small Cap Opportunities LIC (ASX:NSC), and the NAOS Ex-50 Opportunities LIC (ASX:NAC).
The NCC fund invests in sub-$100m micro caps, NSC in sub-$200m caps, while the NAC invests in the roughly $400m capped stocks.
All three funds have produced solid returns over the past year, with the NSC fund returning more than double in the last 12 months.
Evans’ investment philosophy of finding good people in traditional, often ‘boring’ businesses is evident in his stock picking.
Stocks in his micro-cap NCC portfolio include companies like BTC Health (ASX:BTC), a Pooled Development Fund (PDF) that focuses on the distribution of medical devices and pharmaceutical products.
“A PDF means that all income and capital gains are all tax-free for the investor,” explained Evans.
“We know the founder of BTC, he previously ran a very successful business buying medical distribution companies, and wanted to become much bigger. We own 29.9 per cent of BTC as we can’t own more than 30 per cent of a PDF,” he said.
BTC Health deals in niche medical devices and out of the whole NCC portfolio, Evans believes the company probably has the biggest potential to be something significant.
The NAOS NCC fund also invests in Experience Co (ASX:EXP), Australia’s largest provider of skydives.
“EXP is run by the founder, made some successful acquisitions and it sort of unravelled from there,” Evans told Stockhead.
He reckons EXP is a unique stock because it’s almost impossible to get exposure to domestic tourism in the ASX.
Skydiving is also a particularly attractive business because it costs around $400-$500 a pop.
“The chairman of EXP is also the chair of Tourism Australia, so it’s very well credentialled.”
Another stock Evans holds in the portfolio is Saunders International (ASX:SND), a manufacturer of storage tanks which has been listed for 20 years.
“Australia has a significant shortage in storage facilty, and there’s been a lot of talk about how we don’t store a lot of fuel like in the US,” said Evans.
“And now there’s also a large need to store lithiums, and to make those tanks is quite difficult and niche.”
In the sub-$200m NSC fund, NAOS’ biggest holding is COG Financial Services (ASX:COG), a financial broking company.
The company arranges finance for businesses that are buying assets such as heavy equipment, and has recently expanded into insurance broking.
COG is run by a former founder of Steadfast Group (ASX:SDF), who left after the IPO and started COG, said Evans.
Another stock that NAOS invests in is Big River Industries (ASX:BRI), a distributor of building materials and high value architectural products.
Big River, according to Evans, is like the Bunnings for large building companies. The NAOS NSC fund is one of two major shareholders that own 70% of Big River.
“You can sort of get our thematics now, we invest in quite simple businesses,” Evans said.
NAOS’ latest position is a stock called Gentrack Group (ASX:GTK). It’s a New Zealand company which is dual listed on the ASX, and develops software for electricity and water utility companies.
“We’ve bought 20% of that company in the past six months, and the thematic for the stock now is around renewables,” said Evans.
Gentrack’s software for example, is able to track how much energy is consumed at various times during the day for houses or buildings that are using solar panels.
“We think Gentrack could continue to be a leader in this space, and become a lot larger than what they are now.”
In the larger capped space (the NAC LIC fund), Evans has a position in the SaaS company, Objective Corp (ASX:OCL).
“We know the founder and he owns 70% of OCL, so the stock is quite illiquid,” said Evans.
OCL has a good client base, which is mainly governments.
“OCL also does not ammortize their R&D costs like other companies, and the big tailwind for them is if they could enter a large market.”
Evans believes the addressable market for OCL would multiply by 50-fold if they could gain market share in North America.
Eureka Group (ASX:EGH), which provides rental accomodations for seniors, is also one of Evans’ stocks in the NAC portfolio.
“The business model is purely based on fortnightly rentals, and so the investment thesis here is also very basic,” he said.
Asked where he thinks the stock market could go over the next few months, Evans refused to commit, but said there was still an element of optimism in the market.
“There’s definitely still a lot of capital around, and businesses are spending on capex which is a good thing,” Evans explained.
“But at the same time, interest rates are at record lows and so the ability for people to service debt is very easy right now that it’s almost artificial.”
“It’s also interesting to see how stocks that have billion dollar valuations based on just $30 million revenues would play out, especially when interest rates start to rise,” Evans said.
The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead.
Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.