Ask A Fund Manager
The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In this edition, Tribeca Investment Partners portfolio manager Simon Brown explains how PWR Holdings would be safe in our portfolio for years to come.
The ASX share for a comfortable night's sleep
The Motley Fool: If the market closed tomorrow for 4 years, which stock would you want to hold?
Simon Brown: PWR Holdings Ltd (ASX: PWH), the one I talked about before.
MF: To a layperson, the products seem very niche, but is that the whole point — that the margins are very good because of that?
SB: Yeah. What you've got there is, in dominating that niche, they're kind of at around $100 million revenue, you're probably small enough to keep larger competitors who rely on scale at bay.
Then there are people that do cooling for runs of 100,000 Toyota vehicles up in Japan and things like that. They're not going to come down and do a handful of Formula One cooling products for a season. It's just not what they do. Ultimately, they might develop their own technology, but it's not going to move the needle for those sorts of people.
And on the other end of the spectrum, you're entrenched enough with your customers and providing them with such a great solution that… it's a big deterrent for new players who want to invest and develop the expertise to come in and compete.
So that's the beauty of it. They're not big enough to attract the gorillas and they're almost unassailable for people wanting to go in and start from scratch.
MF: It seems PWR is just in that sweet spot there.
SB: Correct, which enables them to earn very good margins and ultimately, which is why it's a stock for 4 years you want to hold. They've got more opportunity than they can handle and it's only about what they can deliver.
They're consistently investing in further capability to keep growing the business. They don't want to outgrow their capability because then you're going to fail the customers and it's going to dent your reputation. So that's why I think in terms of a 4-year story where the market closed, they're just going to continue reinvesting for ROA [around] 25%.
And they'll continue unearthing opportunities. Kees Weel, the founder, he's very much in that business development. His offsider Matt Bryson, who runs the engineering department, comes up with a lot of solutions for new clients looking for bespoke solutions.
That's probably our key one where you could probably put it in the drawer for 4 years and come back.
Looking back
MF: Is there a move that you regret from the past? For example, a missed opportunity or buying a stock at the wrong timing or price.
SB: Always a very hard one to answer… It probably takes me back a fair while to my initial sort of forays into investing personally before I joined Tribeca.
Just prior to Tribeca, as part of my BA portfolio — I remember this still to this day — I invested in a biotech and a resources explorer that were essentially eating up a lot of money and continually raising equity from the market. And they had no revenues. And I ended up riding both of those investments to zero, unfortunately.
MF: With real money?
SB: Yeah. Yeah. So an early lesson for a young kid out of uni and when he's in his first job.
Perversely, as part of our investment process in small caps at Tribeca, we tend to screen out such stocks that carry these binary risks — where they're got to either hit the motherlode in some type of drug or they've got to hit the motherlode on their drilling.
