MoneyTalks: Some key questions to ask before investing in a stock
MoneyTalks is Stockhead’s regular recap of the ASX stocks, sectors and trends that fund managers and analysts are looking at right now and in this edition we’re looking at the questions to ask before investing in a stock.
Today we hear from George Capozzi – a partner and portfolio manager at Adelaide-based Hayborough Investment Partners.
Hayborough’s Opportunities Fund launched on March 1 and made a 30.4% return.
While Capozzi is pleased with the performance he says it’s the long term that matters more.
“People want to hear where the market is going but no one knows,” he told Stockhead.
“Imagine if you knew you were going to have a pandemic, you would’ve shorted the market and you would have been right for 3-4 weeks but then it went back stronger than ever. You just never know.
“So we don’t spend too much time trying to predict the macro – something we can’t predict. We stick to good high quality businesses run by fantastic management teams – businesses that can grow for a number of years, we think that’s going to put is in good stead.”
Capozzi says investing is about finding niche quality businesses that can grow no matter what the economy does, and can ride out short-term downturns.
“We’re pretty sector agnostic so we don’t have too many themes because what we’re trying to find is intelligent experts who are running really niche quality businesses that can grow despite what the economy does, so it could be in any sector,” he said.
“The things we try and think about [include]: Is this a good business, are the economics attractive, has it got a balance sheet that can survive a downturn and become stronger when they come out on the other side?
“Is it a business that can produce cash, [can it] keep reinvesting that cash in its own business?
“And is it run by people who we think are exceptional? Who create a good culture for staff, who treat their customers with respect and basically everything they’re doing is to look after their customers?
“We try and break business apart to work out what could go wrong, what we’re missing, what’s the downside scenario, tailwinds that the business might have.
“We’re happy as we have a portfolio of those companies we think can do well in the long term. So we’re not too sector specific.”
Capozzi says Hayborough’s methodology was developed gradually across his two-decade career which included stints at Barclays in London as well as with Deutsche Bank and Taylor Collison in Sydney.
It was similar for his business partner Ben Rundle who worked for Moelis, Ord Minnett and Macquarie.
“I met with founders of businesses and learnt what was a good business, what was an average business, what was a bad business, what type of people you want to back.
“Ben and I were very aligned on what we thought was a great business and where we wanted to go. We knew each other for 15 years, we played in a footy premiership together – so we know each other quite well – and that’s how we built [our] philosophy.
“We spent a lot of time in board rooms, meeting companies, discussing potential investments and that gave us the confidence to come together.”
One investment that has paid off for Hayborough is third party fund administrator Mainstream which listed in 2016 but was founded in 2006.
“They just wanted to do funds administration really well. That’s all they cared about – pleasing their clients.
“They were always investing for the future. In each result the top line was growing, the bottom line didn’t look as attractive but what they were doing was investing for long term.
“The management team asked: ‘Do you want this business to look good now or do you want this to be a larger business in 3-5 years time?’ This is what they did.”
Mainstream was gradually expanding in the US, until it received a takeover offer at $2.80 per share – nearly triple what Hayborough first got in at.
“That’s been a big contributor but an example of a company we like to back, [with] founders and management team who are quite clear on operating a simple business,” Capozzi said.
“A boring business, but they’ve done well.”
Capozzi says although he is typically sceptical about IPOs, this Kiwi chemical manufacturing and distribution business was a recent addition to the portfolio.
One reason was its founder Simon Henry.
“[He’s a] passionate founder, he wants to build the business and has clear vision for what he wants to do, as opposed to a financial vendor who wants to exit the business.
“We did a lot of work on DGL and Simon, [we spoke with] a lot of contacts in that chemical industry and it stacked up to us.
“It listed at $1, we didn’t get much stock from the broker – way oversubscribed. It opened at 94.5 cents – we couldn’t believe our eyes – so we made it one of our positions at around $1 and in the short term it’s done well.
“Simon has executed as much as he can, so that’s been good contributor as well.”
This software company is another that has delivered for Hayborough with Capozzi labelling it “the type of business we like to back”.
“Tony Wall started the business in the mid 1980s. All he does, he’s laser focused on making sure he delivers for his clients,” he said.
“They listed in 2000 and raised $6m – half of which went to cash out a founder – and he hasn’t raised a dollar since and has bought back stock.
“He still owns a huge chunk of the business and he’s only just getting started, it’s [capitalised] over $1b now and still relatively unknown by the market.”
Capozzi noted even now there are few analysts covering Objective Corp. He admits there’s little incentive for brokers wanting ECM or trading opportunities to cover them, but that’s because the company can make money on its own and therefore doesn’t need them.
“A lot of stocks we’re looking for aren’t covered by brokers,” he said.
“Stockbrokers make money by trading and raising capital for businesses and sometimes a lot of these businesses are so good they don’t need to raise capital. They’re cash generative and can reinvest and stockbrokers don’t have interest so you need to go out and do the research yourself.
“So that’s one floating under the radar.”
“Even a company like Reece Plumbing, Reece is a huge business, it’s one of Australia’s best plumbing businesses,” Capozzi continued.
“This is a business that was capped at $5-6b but was hardly covered by the market until they made that acquisition in US [Morsco], suddenly JP Morgan raised money.”
JP Morgan raised $600 million for the company in April 2020 at $7.60 per share and it has nearly tripled since then off the back of the boom in the home improvement sector generally.
“But this is a business [that’s been] going on a decade going under the radar and doing the right thing by shareholders,” Capozzi said.
“It’s not well owned – as it wasn’t in index, it was seen as illiquid – but is a high quality business, why wouldn’t you want to own it?”
Capozzi again stated short term movements were irrelevant if you were an investor.
“You’re either a trading or an investor – they’re two different things. Traders are trying to take advantage of short term price movement – that’s definitely not us,” he said.
“We don’t care what share price does in one, two, five days, a week or a month. As an investor you have to be 100% sure a business is going in right direction fundamentally.
“The share price will eventually take care of itself.
“For us, particularly in the pandemic, we got excited as investors that the businesses we wanted to own, we think are fantastic high-quality businesses, you could buy on sale at 50% off.
“As investors you get super excited as you know these businesses have been around for a long time, and will be around for a long time – customers can’t live without them. It’s an opportunity to buy more shares.
“So what happens in the short term is irrelevant.”
The views, information, or opinions expressed in the interviews in this article are solely those of the interviewee and do not represent the views of Stockhead.
Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.