Imagine you bought the stock below roughly near the bottom at 40c on the left hand side of the graph.
That was March 2009 and the bottom of the GFC when the sky was falling on our heads. As we know, the market then rallied in a big way and this stock went nuts climbing up to $1.94; a close to 5 bagger on your investment. Can't think of anyone who wouldn't be happy with that.
Move forward to 2011; a grinding year where the S&P ASX 200 almost hit 5,000, but didn't and then just headed south for the rest of the year to breakdown below 4,000 and wallowed there along the bottom. So too has the stock retreated all the way back down to $1.20; a spicy 38%.
Throughout this time the stock was never 'cheap' on a traditional value basis. In fact, even though it had been around for a while, it was still not making money in 2009 and was hardly making any in 2010 and 2011 giving it a PE in the 30's. It wasn't paying a dividend during this time until September 2011 when it paid 1.5c. The fixed cost base was high for its industry. Management had an excellent reputation but this was a relatively new venture for them and had to yet prove themselves.
Traders were probably already stopped out at this point. Fundamental investors might be wondering why they are holding this thing. If you hadn't already bought it, and as a good contrarian value investor your wonder who would buy a stock that has already moved up in orders of magnitude and wasn't cheap. You would look pretty silly if you bought it and it went down, right?
Check out the graph below, which shows the continuation of the graph above - i.e. the subsequent performance of the stock:
You can see the subsequent performance is outstanding. And during this time the stock started paying dividends, so Total Shareholder Return (TSR) is actually much higher. Let's put some numbers around this performance. Assume you bought it at $1.50 in May 2011 - roughly halfway during it's decline after peaking at $1.94 in early 2011. The current price of this stock is $18.49 and has paid out $1.47 in dividends including franking (all of the dividends have been fully franked) so the total pre-tax return is $19.96. Not bad for a $1.50 investment. That's a 13 x return on your investment. IRR is a blistering 142% p.a.
And remember, this is buying it after it had already increased several times over, so you have by no means picked the bottom.
This is not a nano cap that nobody had heard of.
So which stock is this?
The stock is Magellan Financial Group (MFG). MFG is a funds manager that was launched after the founders noted that Australian investors were underexposed to international shares and Platinum had that part of the market to themselves at the time. That was correct - I was once-upon-a-time a financial planner and Platinum was seen by many as the only real serious international equity manager that wasn't a closet index hugger available on investment platforms. MFG have done a superb job at building a quality team and have built the business into a serious funds manager with $37.2bn FUM. It's an outstanding success story.
For investors, I think there are several lessons from the meteoric returns of MFG:
Scaleable businesses are amazing but patience is required
Funds management is massively scaleable. Just like software and franchise businesses. However they may not make much money to start with, so it's important to take a long term view of the company. More importantly than the short term financials is the top line growth. Can management build revenue? Is there macro head/tailwinds? What is the competitive environment to stop the top-line being grown? If the business is genuinely gearing itself up for massive growth, then quite possibly the short term financials may actually be quite poor as investment is made into product, people and marketing.
Don't be afraid of heights
It doesn't really matter if the stock has already increased several times over if the story stacks up. You would still have made a massive amount of money even if you bought at the interim top in early 2011. Personally I think looking at charts can sometimes cause false vertigo as it puts a frame around your perspective. Look again at the first chart and honestly ask yourself whether you would have thought the performance would have been what you see in the second graph.
Diamonds in your back yard
Ironically, MFG was set up as an international funds manager yet itself has proven to be an absolute diamond of an on the ASX. And just look at how many fund managers are pushing their clients to invest overseas using the sales pitch of a bigger pool and more growth offshore. This may be true, but you only need one MFG in your life...
Inverse of a cigar butt
And remember, this is buying it after it had already increased several times over, so you have by no means picked the bottom.
This is not a nano cap that nobody had heard of.
The stock is Magellan Financial Group (MFG). MFG is a funds manager that was launched after the founders noted that Australian investors were underexposed to international shares and Platinum had that part of the market to themselves at the time. That was correct - I was once-upon-a-time a financial planner and Platinum was seen by many as the only real serious international equity manager that wasn't a closet index hugger available on investment platforms. MFG have done a superb job at building a quality team and have built the business into a serious funds manager with $37.2bn FUM. It's an outstanding success story.
For investors, I think there are several lessons from the meteoric returns of MFG:
Scaleable businesses are amazing but patience is required
Funds management is massively scaleable. Just like software and franchise businesses. However they may not make much money to start with, so it's important to take a long term view of the company. More importantly than the short term financials is the top line growth. Can management build revenue? Is there macro head/tailwinds? What is the competitive environment to stop the top-line being grown? If the business is genuinely gearing itself up for massive growth, then quite possibly the short term financials may actually be quite poor as investment is made into product, people and marketing.
Don't be afraid of heights
It doesn't really matter if the stock has already increased several times over if the story stacks up. You would still have made a massive amount of money even if you bought at the interim top in early 2011. Personally I think looking at charts can sometimes cause false vertigo as it puts a frame around your perspective. Look again at the first chart and honestly ask yourself whether you would have thought the performance would have been what you see in the second graph.
Diamonds in your back yard
Ironically, MFG was set up as an international funds manager yet itself has proven to be an absolute diamond of an on the ASX. And just look at how many fund managers are pushing their clients to invest overseas using the sales pitch of a bigger pool and more growth offshore. This may be true, but you only need one MFG in your life...
Inverse of a cigar butt
As noted, MFG never looked particularly cheap on standard value investor metrics. You really needed to take a longer term, DCF view to see the potential. This is the same with most growth stocks to be able to get your head around paying a PE of 20+ (if it's making money at all). Sure, growth stocks have been bid-up, so perhaps you could argue MFG and other similar growth stocks may not otherwise be at their current prices. But even a decent pull back in prices has still yield MFG investors obscene returns. However the main point is the reliability of the DCF. With a 'concept' stock it's a crap shoot. With simple(r), observable businesses like MFG, DMP and REA predicting growth is easier yet not obviously not fool-proof.
Kristian
Disclosure: no position in MFG.
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