INTU bought

Markets had a bit of a wobble since my last update a couple of weeks ago, but are now looking up again. The financial news often feels like Groundhog Day at the moment, with the same concerns about a US or global recession, the reaction of the Fed, inverted yield curves, trade wars and Brexit appearing then receding from week to week. My portfolio has been holding up relatively well apart from one fly in the ointment – Burford Capital.

It is an interesting time for UK politics. While I don’t think it should be a major consideration for long term investors, there are some short term risks. The recent European elections and Peterborough by-election have provided some indication of how uncertain the results of the next UK general election may be, given our first-past-the-post electoral system. A Corbyn government is starting to look like a possibility, unless the Tories can reclaim the votes they have been losing to the Brexit party. It seems likely that the next Tory leader will need to commit to a ‘no-deal’ Brexit if no better deal can be reached. The increasing likelihood of either a Corbyn government or a no deal Brexit (perhaps both?) doesn’t bode well for sentiment in UK equities or the Pound, at least in the near term. The Pound has indeed been falling over recent weeks. For now I am glad that the vast majority of the earnings for my portfolio constituents come from outside the UK.

My large position in Burford Capital has continued to be the main drag in my otherwise strongly-performing portfolio. Following the Cannacord Genuity note I talked about in my last update, the latest blow to sentiment has come from the ignominious collapse of Woodford’s equity income fund. Woodford is one of Burford’s largest shareholders and is likely to be forced seller as he works through the mess created by his inappropriate allocation to unlisted investments in an open-ended fund. I don’t think any long term Burford investor should be worried by this – any effect on the share price should be short-lived. I have conviction in Burford so am prepared to stay the course. However, the recent underperformance in the share price has reignited the constant dilemma I face in whether to hold certain higher conviction positions through volatility or whether to just mechanically follow momentum wherever it goes. My mechanical benchmark portfolios have started to motor ahead of my actual portfolio again, mostly thanks to the fact they ditched Burford some time ago, while I have been adding to my already large position. Fingers crossed that my conviction in Burford ultimately pays off!

Last week I made one trade, selling out of Moncler to buy Intuit. Momentum at Moncler was starting to weaken again, likely due to sentiment about the trade war. In this case I decided to let the faltering share price to override my conviction.

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Intuit

Intuit is a large US business, about £50bn market cap, which supplies accounting software, Quickbooks, to small business and software for preparing tax returns, TurboTax, to US consumers.

Quality

  • Business economics: Intuit has excellent economics. It is capital-light and very highly profitable, with returns on capital in the 40s. Its subscription business model ensures a high proportion of revenues are recurring.
  • Track record: Intuit has an excellent track record with steadily growing revenues and profits for quite a few years, rewarding shareholders handsomely.
  • Competitive advantage: Intuit’s competitive advantage seems fairly obvious. I don’t know the products first-hand, but from what I gather they seem to be somewhat higher quality than those of rivals. At least they are certainly more successful – Intuit is a clear market leader with a strong brand. Switching costs for customers seem likely to be fairly high. I’m optimistic that its scale in gathering data from its customers will give it a growing advantage over the long term.
  • Growth prospects: Intuit’s markets have strong growth prospects, especially in serving small businesses and internationally. Over the long term there seem likely to be plenty of strategic opportunities to add further services to the ecosystem. Overall there seems plenty of scope for steady growth for years to come.

Price

Intuit’s recent results came in ahead of expectations. Share price momentum is also good. The valuation is a bit on the punchy side but I think is warranted by the long term prospects.

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