Having a few simple rules is a great way to keep you focused when investing.
But rules, as they say, are only for the guidance of wise men.
Motley Fool co-founder David Gardner runs the Motley Fool (U.S) 'Rule Breaker' investing service and looks for six simple, but crucial, characteristics when hunting for long-term winning companies, some of which break common investing wisdom.
So how does hyper-growth mobile donation and payment company PUSHPAY FPO NZX (ASX:PPH) compare to Gardner's six 'Rule Breaker' criteria?
1. A "top dog", "first mover" company in an important, emerging industry
Gardner's first criteria fits Pushpay nicely. The adoption of mobile payments is still in its infancy and Pushpay was one of the first to see the potential to transform the way people give money.
Since then Pushpay has moved rapidly to capitalise on its first mover advantage targeting US$100 million of Annualised Monthly Committed Revenue by 31 December 2017, growth of 73% in 12 months.
2. Holding a sustainable advantage
A sustainable advantage, says Gardner, can be gained through "business momentum, patent protection, visionary leadership, or inept competitors". The payments space is rife with competition, but Pushpay cleverly targets a niche not being served by many others: non-point of sale mobile base payments where it has quickly gained momentum.
Pushpay also integrates into the business operations of its customers which creates a level of switching costs against competitors.
3. Strong past share price appreciation
Here is where traditional investing rules start to go out the window. David Gardner's 'rule breaker' criteria looks for companies which have a history of strong upward share price momentum. In Gardner's own words "We think the winners generally keep on winning."
In 2014 Pushpay listed in New Zealand with a market capitalisation of NZ$50 million. Yesterday, just over three years later, the company passed the NZ$1 billion mark. Shares only listed on the ASX in October last year, but are up 76% since then. Tick.
4. Good management and smart backing
Co-founder and CEO Chris Heaslip certainly qualifies as a visionary leader and someone with a history of delivering on the aggressive goals set for the company.
5. Strong consumer appeal
Strong consumer appeal is about giving customers a positive experience to generate repeat business. Pushpay solves the problems of cash handling for both givers and recipients which adds value on both sides.
I have the Pushpay app on my phone which is well designed and very easy to use. A less subjective measure of the appeal of the service provided is perhaps Pushpay's consistently high revenue retention and growth rate.
6. Documented proof that the stock is considered overvalued according to the financial media
Gardner's final point, similar to number three, goes against conventional investing wisdom. Being labelled over-priced, he argues, is less relevant if the other five 'rule breaker' characteristics ring true because great, long-term companies regularly command high valuations. Gardner cites Amazon as an example which was labelled 'over-valued' back in 2000. Since then Amazon shares are up over 4,700%.
A quick web search for "Pushpay overvalued" yields mostly scrappy, conjecture filled investment forums, but there is certainly the occasional "eye-wateringly expensive" comment.
I suspect there will be much more of this now that the company's market capitalisation has hit NZ$1 billion.
Most criticisms revolve around the company not producing a profit, an argument often thrown at accounting platform XERO FPO NZ (ASX: XRO) during its rapid growth phase. However investing heavily in growth is an important strategic move to grab market share and add long-term value.
There is often more potential risk to owning fast-growing, cash burning companies, but I think based on Gardner's six criteria Pushpay would sit high on the spectrum of potential 'Rule Breaker' investments.
