Liontrust Asset Management

Liontrust is 4% of my portfolio and is up 16% on my purchase price. I bought this mostly on the basis that it scored very highly in my quality screening and its cheap valuation.

Quality

Liontrust is a classic fund manager. These businesses have good economics but are in quite a competitive sector. I think Liontrust is reasonably high quality but does face risk from competition in the long term:

• It may have a bit of a competitive advantage at the moment. It is experiencing good performance across its funds with net inflows and anecdotally has some good managers. It appears to be building a good brand for itself.
• However, it is not clear that this is a very sustainable moat. It is reliant on its staff for its competitive advantage and these staff can leave. The industry is competitive. It appears possible but a challenge to build a brand that can endure in this market.
• The business is high quality in terms of its economics. It is highly scaleable and cash generative with low marginal costs and high ROCE. There is consequently considerable scope for growth.
• It has been experiencing consistent growth in profits and FCF for the last few years.
• As a fund manager it is likely to be fairly cyclical (but not excessively as it has little need to make costly investments)

Pricing

It currently has great trading and share price momentum. Its valuation appears extremely cheap given the quality of the business and the current momentum.

While I have some misgivings about holding a small fund manager, Liontrust seems to be in a sweet spot at the moment at a bargain valuation and I believe there is a reasonable chance that it may continue to develop into an enduring brand in the longer term.

Brainjuicer

Brainjuicer is 3.7% of my portfolio and is up 123% on my purchase price. I bought when it seemed anomalously cheap. It grew to one of my largest positions but I trimmed back quite a bit following the recent results, which whilst good did remind me of Brainjuicer’s possible weaknesses.

Quality

Brainjuicer is an innovator of somewhat unique advertising product/service that uses insights from behavioural economics and psychology.

Overall I think Brainjuicer could be a great business but it’s not clear at the moment whether its products are really going to take off properly:

• Brainjuicer has a business with great economics: very high margins, cash generation and returns on capital. It has also demonstrated consistent growth in revenues and profits over its lifetime.
• It appears to have good growth drivers at the moment. A shift in product focus to more quantitative products means revenues are more scaleable. Brainjuicer’s  IP grows in value over time along with the quality of the data. This is undoubtedly a good strategy.
• There are competitors and references to ‘pricing pressure’ in Brainjuicer’s reports which is something of a concern – but it nonetheless appears to be doing something a bit different and to have a growing ‘moat’.  However, demand for its product is yet to really take off.
• Most worryingly, there are many references in its past reports to poor revenue visibility. It is not this in itself that troubles me, but rather the corollary that Brainjuicer’s customers don’t really find its services to be essential. Hopefully the greater focus on the data driven product can ameliorate this over time, though to me there does seem quite a big risk that Brainjuicer goes out of fashion or is replaced by something better. Similarly demand for its products may be quite cyclical.
• It is founder managed.

Pricing

Momentum is good on both price and newsflow. However, I’ve noted how volatile the price can be because of the lack of liquidity in the shares so this can change very easily. The valuation seems reasonable to me if growth continues as expected.

I think Brainjuicer has a place in my portfolio and deserves some faith given its track record. It has every chance of growing into a great business but I have to say I am somewhat sceptical. Let’s see what happens!

Patisserie Holdings

Patisserie is 3.6% of my portfolio and is up 14% on my purchase price.

Quality

Patisserie owns the Patisserie Valerie brand of cake shop/cafes. It is my first foray investing in a ‘retail rollout’. To me it looks like one with a decent brand and good chance of success:

• Having visited Patisserie Valerie it seems like a good brand with a sufficiently differentiated proposition to many other high street chains to give it a good chance of success.
• It appears to have a good growth runway with lots of potential for new locations.
• Its historic performance is great: consistent growth, including LFL sales and high ROCE. Impressively for a retail rollout it is debt free.
• Its management has good reputation and experience (Luke Johnson of Pizza Express fame)
• I don’t think it is likely to be very cyclical but not totally sure.

Pricing

The newsflow is very good with better than expected results recently. The share price momentum is not so great but has bounced recently. The valuation seems fairly reasonable given the quality of the business.

Supergroup

Supergroup is 3.5% of my portfolio and is down 7% on my purchase price. I bought recently, having identified Supergroup as a good candidate through my own screening.

Quality

Supergroup is a fashion brand owner, involved in both retail and wholesale. It appears high quality to me for a number of reasons:

• Its ‘moat’ obviously comes from its Superdry brand, which allows it to sell clothes at absurdly high margins. The Superdry brand is definitely ‘hot right now’. It is a pretty strange combination of a British brand using American vintage with Japanese characters. I suspect it will endure for some time and be able to evolve though I do have some nagging doubts that it could be a bit faddy. Good management is critical.
• Supergroup is in a growing market with no technological risks. There is a lot of opportunity for more geographic expansion. It is unlikely to be very cyclical.
• It has delivered consistent growth in revenues and profits over time with a high ROCE. It has recently been making a lot of capital expenditure for future growth.
• Up until recently it was led by its founder – he has now taken role as brand director.

Pricing

Momentum is fairly good with recent good results (but seems to have tailed off a bit since I bought unfortunately). I think the valuation is very cheap given the projected growth. I really like it and have built up a position quickly but am now feeling a little cautious until momentum resumes.