Buy Hold Sell

Buy Hold Sell: 5 undervalued founder-led stocks

Tue 02 Apr 24, 9:02am (AEST)
20240328 BHS1 Primary
Source: Livewire Markets | Blackwattle's Tim Riordan and Auscap's Will Mumford

Key Points

  • Founder-led companies consistently outperform peers due to traits like business insurgency, front line obsession, and an owner's mindset, leading to long-term profit growth
  • Examples of founder-led stocks on the ASX include Corporate Travel Management, Lifestyle Communities and PSI Insurance
  • Fund managers Tim Riordan and Will Munford recommended founder-led companies like NIB and Wisetech for their alignment, market opportunities and high-quality performance

It's well-known that founder-led companies outperform those led by hired suits. In fact, in 2016, Bain & Company found that founder-led companies listed on the S&P 500 performed 3.1 times better than their peers over a 15-year period (see below).

Screen Shot 2024-03-28 at 2.37.25 pm
Source: Bain & Company/Harvard Business Review

But why is this?

Having developed a database of all public companies in global stock markets and tracking their performance over 25 years, Bain & Company found that the companies most successful at maintaining profit growth over the long term disproportionately were companies where the founder was still running the business, still involved on its board, or where the principles the founder originally put in place persisted.

That's because founders possessed these three traits:

  1. Business insurgency - A unique feature or capability that gives a business purpose, waging war on industry norms on behalf of its clients.

  2. A "front line obsession" - A focus on the details at the front line and culture.

  3. The "owner's mindset" - Possessing the speed to act quickly and taking personal responsibility for risk and cost.

So, which founder-led stocks are flashing buy signals on the ASX?

In this episode, Livewire's James Marlay was joined by Blackwattle's Tim Riordan and Auscap's Will Mumford to find out.

Note: This episode was filmed on Wednesday 27 March 2024.

Edited Transcript

James Marlay: Hi there folks. Welcome to Buy Hold Sell. My name is James Marlay and I know many of you out there on YouTube are going to be disappointed that I'm stepping in for Ally Selby. We know how much you love her colourful outfits. Here I am in my boring grey suit from 2019, but our episode today is going to be a cracker. We often hear fund managers talking about how they love founder-led stocks. We've got a couple that we think are on the cheap. We're going to find out if our guests today think they are a buy, hold, or sell. My guests are Will Mumford from Auscap Asset Management. Will, welcome.

Will Mumford: Thank you.

James Marlay: And Tim Riordan from Blackwattle. Good to see you, Tim.

Tim Riordan: You too, James.

Corporate Travel Management (ASX: CTD)

James Marlay: As I said, we're talking founder-led stocks. Let's get started. Tim, I'll start with you. Corporate Travel Management. Jamie Pherous is the founder there. Missed expectations in February. It's really struggled to recover post-COVID. Buy, hold, or a sell?

Tim Riordan (HOLD): We're a hold. Definitely come back since COVID and heady days of higher multiples. Sort of feel like the balance is okay here. Basically got some consternation about where margins go, but with the multiple where it is and a target to double the revenue base of the business over the next several years, feel like it's evenly placed.

James Marlay: Okay. Will, I saw Jamie Pherous bought close to $1.4 million of stock on market. He reckons it's a buy. What about you, buy, hold, or a sell?

Will Mumford (HOLD): I'm a hold, and I think there are some positives there. It's had a great record since it listed, and the travel thematic is always a good one to get exposure to, but I really like simple businesses, and I've found it quite a difficult business to analyse from the outside. And I think there have been a few examples now where both myself and the broader market have been surprised by some of their updates.

And like Tim mentioned that they have put out a target over the next five years to grow revenue at 10% and earnings at 15% plus over the next five years. But at the same time, they've just had an earnings reset. They're calling out issues in the broader corporate travel market, Israel, UK government contract. And so, there's just too much uncertainty there right now for me to pull the trigger.

Lifestyle Communities (ASX: LIC)

James Marlay: The next stock is Lifestyle Communities. It caught the market by surprise with a capital raising, which it hadn't done for some time. Is it a buy, hold, or a sell?

Will Mumford (HOLD): Again, I'm a hold for that one and it gets the hold because the CEO has just put $10 million into the business. I've only heard positive things about the LIC Communities. And also, it's a great thematic well-suited to the current housing shortages, but I've got four issues here.

So, firstly, I like businesses that are really cash generative. And because LIC spends upfront front on CapEx to then generate annuity income, it's not very cash generative. If you were to sum up its operating and investing cashflow over the last decade, you're left with a negative number.

The second point is that their core demographic is the 67-year-old Australian. And on the ABS's projections, within about five years, that demographic is in decline as we move from baby boomers into GenX.

The third point is I think there's an element of regulatory uncertainty with the sector. If you move into one of their communities, you don't pay stamp duty, but at the same time, you can use rental assistance from the government to pay your site fees, or 30% to 40% of your site fees.

The final point is that we've now got players like Stockland moving into the sector and they don't charge their community members a deferred management fee, whereas LIC is currently expecting a deferred management fee of 50 grand plus on all of its sites. And so, I think there's risk to that revenue stream longer term.

James Marlay: Tim, James Kelly, who was on a podcast on Livewire not that long ago, he said they're seeing more opportunities than ever bought before to buy land at attractive prices. Is it buy, hold, or sell for you?

Tim Riordan (SELL): We're a sell. We followed James for a long time and think that he's done some really special things, particularly the culture of the business. Real proponent for the industry. Will touched on competition, I think that's been an issue that has perhaps contributed to what was really quite a poor result in February. A bit of a surprise in terms of the delay to settlements, which put a lot of pressure on cash and the balance sheet for the business.

James has always said to us that the business is self-funding, and it could grow that way. Now admittedly, you're right, he's got his foot on more land and more developments than he ever has had before, but at the same time, he's raised capital. Take Will's point that he's put money in, but at the same time, that's - I guess - a deviation to before. So, we prefer to sell for now.

PSC Insurance (ASX: PSI)

Marlay: Okay. PSC Insurance, the code is PSI is our next stock. There's been media speculation around takeover activity. Buy, hold, or sell?

Tim Riordan (BUY): We're a buy. We think that the business is super well run, controlled by the Dwyer family and a bunch of other insiders, and it's sort of like the sneaky third insurance broker in Aus. It's just that bit smaller than Steadies [Steadfast] and Austbrokers that it's flown under the radar just that little bit.

Not sure what attracted the corporate attention. And it is a well-run business, it's got enough scale to pop up on global radars with not just the Aussie business but UK as well. So, it feels like maybe that's just option value, but we really like the way the business is run. So, yeah, it's a buy.

James Marlay: Okay. Well, the shares are up nearly 10% over the past 12 months. It's trading close to the top of its 52-week range. Buy, hold, or sell for you?

Will Mumford (BUY): I'm a buy as well. It's one that we've held onto for quite a while and hopefully we'll be able to keep holding onto it. So, the appeal of insurance brokers is pretty simple. Factors like low insurance sector profitability, the increasing cost of reinsurance, capital, inflation, climate change, these are all pushing insurance costs structurally higher.

And the insurance broker sector is pretty much a toll road on this growing spending without having the claims risk that the insurers have. On top of this, it's a pretty fragmented industry. The sector can often make acquisitions that can drive earnings growth well into the double digits. So, PSI, it's got a privileged business model. It's got insider alignment, it's got balance sheet for further M&A, and there's been corporate interest, which at this stage looks a fairly high chance of taking.


James Marlay: I've asked both our guests to bring along a founder-led company that they think looks attractive at today's prices. Will, we'll start with you. What's your pick?

NIB Holdings (ASX: NHF)

Will Mumford: My pick is NIB, and technically it's not founder led, but Mark has been there for over 20 years. And at the last AGM, he said that 90% of his net worth is in the business, which is north of $20 million. So, I think he's very aligned.

Now, there's been a bit of noise around the sector recently with an NDIS review. There was some politicisation of the last premium increase, and there's been some press recently with private hospitals. But the key for NIB that you've got to remember is that if you look at the federal budget and you look at the 10-year growth forecasts of the major line items, the areas where the government expects the most growth apart from interest is healthcare and the NDIS. And I think NIB is the best way on the ASX to get exposure to the growth in this spending, whilst being at a high return on capital, also taking market share on top of this, and it only trades on the ASX's market multiple.

James Marlay: Okay, very good. Tim, have you got something better than NIB?

WiseTech (ASX: WTC)

Tim Riordan: It's different, WiseTech. WiseTech is one of those classic founder-led businesses. Obviously, Richard White still controls 40% of that stock, which is pretty incredible. So, what do we like? Again, we're looking for high-quality companies. This ticks almost every box. You could probably shoot some holes at it for capitalising their development expenses, but otherwise super high margins, really strong returns, global growth.

Digging under that, one of the things that we think is just an incredible position that the business is in is its absent any major competitor, and we think this sets it in really good stead as it looks to expand beyond its core in sea and air freight. So, the opportunity for them to continue to grow we think is actually underappreciated.

In looking at really high quality businesses and trying to do some research to understand what might be over the horizon, I feel like investors often underappreciate the duration of how far out these high quality businesses can persist in terms of those margins, and earnings, and that profile, that delivery. And so, it looks like a special to us to beat their margin target in a couple of years and go on from there.

James Marlay: Okay, awesome. Well, folks that wraps up our episode looking at founder-led companies. I hope you found a few ideas in that one. Remember, hit the subscribe on the YouTube channel. We're adding fresh content just like this every week.

Written By

Buy Hold Sell

Buy Hold Sell is a regular video series where Australia's leading professional investors share their views on Australian and Global Shares. This content is produced by Livewire Markets and has been syndicated to the Market Index website.

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