A decent week for the markets last week, though marred by a big fall in my largest holding Arista Networks on Friday. As the markets continued to rebound strongly, despite further signs of inflation ahead of expectations in the US, I decided to reinvest some of my portfolio cash balance. I still anticipate some more turbulence ahead, though think the signs look generally bullish. I bought two new positions in Trigano and Paycom.
Trigano is a French manufacturer of recreational vehicles. It operates through various subsidiaries across Europe.
It is not the usual type of capital light business I like to invest in, but it does seem to have a competitive advantage and to be on a roll at the moment. While I don’t think it is the highest quality business, I was sufficiently satisfied to include it on the watchlist, particularly as it improves the diversity of EU shares on the watchlist.
- Business economics: Trigano is currently experiencing high levels on profitability and returns on capital. However, this high profitability is very recent and has increased substantially over the last few years. Trigano has been generating a lot of cash and has net cash on the balance sheet.
- Track record: Trigano has a track record of rapid growth in revenues and profits but only for the last five years or so. The share price has correspondingly done very well since then. Before that, the price had been fairly stagnant for a number of years. This suggests to me that Trigano is taking advantage of current opportunities, rather than being a consistently high quality business.
- Competitive advantage: The European recreational vehicle market is surprisingly fragmented, with few strong brands. Trigano has been taking the opportunity to consolidate the sector with a few acquisitions and is the number one player. While it runs its subsidiaries in a relatively hands-off way, its increased scale gives it some advantages, such as the ability to increase capacity more quickly in response to growing demand, as has been the case recently.
- Growth prospects: the recreational vehicle market is booming across the world at the moment and looks likely to experience secular growth for some time to come. I am not sure of the exact reasons for this, but can see that the flexibility and affordability of RVs is likely to be attractive to many. Trigano looks well placed to benefit from this growth trend in Europe.
Momentum is strong: the share price has endured the recent volatility fairly well and the company recently issued a trading updated ahead of expectations. The valuation looks cheap even if growth slows considerably. Much depends on how long the current boom in the recreational vehicle market has to go.
Paycom is a rapidly growing US-based business in one of my favourite sectors. It provides cloud-based management software to support recruitment, payroll and other HR functions.
- Business economics: Paycom is a capital light business and is extremely profitable. It has huge margins and returns on capital and has been able to generate huge growth from fairly modest capital investments.
- Track record: Paycom has a fairly short track record as a listed company, though has experienced spectacular growth since then.
- Competitive advantage: one of the reasons payroll and HR focussed IT is one of my favourite sectors is that customers are repeat purchasers and are ‘sticky’ as they tend to find it costly to switch frequently between suppliers. This leads to a high proportion of revenues being recurring. So while there are a number of competitors in this space, including several larger than Paycom, in the short to medium term competition between them is muted. In the longer term, Paycom’s rapid growth suggests to me that it has a quality offering that should offer an enduring advantage. My (somewhat superficial) internet research suggests that Paycom has high customer satisfaction.
- Growth prospects: the growth prospects look excellent. The overall market is defensive and likely to experience secular growth for years to come. Paycom has ambitious expansion plans and is opening new offices in cities across the US. It is still relatively small and can continue to grow rapidly, increasing its market share. There are likely to be a lot of opportunities to add value with new products and improvements.
Momentum is excellent with the share price making new highs and Paycom recently issuing excellent results. The valuation is high but I think reasonable given the growth prospects.