It’s that time of year again, when I’m asked to share some stock picks for the year ahead. Although portfolio construction and maintenance is a constant and never ending process, the start of a new year is a good time to look for companies that the market hasn’t fallen in love with yet. Of course, time will tell if my selections perform.
Many of the companies that we invest in at Wilson Asset Management fall outside the heavily researched top 200 names on the stock exchange and are classified as small caps. That is often where the resourceful and indefatigable investor can make money out of identifying the future leaders of the ASX.
As you may expect, investing in smaller companies often carries additional risk and you have to be prepared to do a lot of your own homework.
Prospective small cap investors looking for undiscovered companies need to read extensively to identify interesting investment opportunities and they then need to spend a lot of time researching them. Of the three undiscovered stocks I’m writing about today, two of them have a very long history of strong growth as unlisted companies before listing on the stock exchange in the last seven months.
Frequently, investors make the mistake of ignoring what a company has achieved before it becomes a listed entity and this can provide excellent opportunities for investors prepared to do the work.
IPH Limited (ASX: IPH), better known as Spruson & Ferguson, the patent and trade mark attorneys, is one of the leading intellectual property services firms in the Asia-Pacific region. After a long history as a private company dating back to 1887, it recently listed on the stock exchange.
IPH Limited (IPH)
The industry fundamentals are strong. IPH is one of the first patent attorneys to list, providing the potential to act as a consolidator of the sector going forward. The industry is characterised by good cash flow, recurring revenues and high quality clients, particularly so at IPH.
IPH has been one of the most successful IP services firms in Australia, expanding into Asia for further growth in 1997 and has shown dynamism within a still conservative industry.
Mantra Group (ASX: MTR) was established in 2007 and listed on the ASX in June 2014. MTR is an Australian accommodation operator and has exhibited strong growth to become Australia’s second largest network of hotels, resorts and serviced apartment properties since it was established. It has a portfolio of 115 properties and 11,000 rooms across Australia, New Zealand and Indonesia.
Mantra Group (MTR)
In the last decade, Australia has seen an undersupply of new hotel rooms being built to meet the increasing demand from overseas and domestic travellers. As a consequence, hotels are experiencing very high occupancy rates and seeing increases in RevPAR, or revenue per available room (a common performance metric in the hotel industry) across Australia.
Mantra has also been innovative in extending its brand out to South-East Asia. It has a flexible business model through owning, franchising and/or managing hotels, thereby optimising its capital model and has proven to be a good operator.
My third pick of great stocks you have never heard of has completely different but compelling reasons to invest in. Future Generation Investment Company (ASX: FGX) is Australia’s first listed company with dual financial and philanthropic objectives.
I’ll declare my interest in this one straight up. I am a director of Future Generation Investment Company Limited and Wilson Asset Management is one of the participating fund managers investing FGX’s capital. But I am behind this initiative because I believe in what it’s doing.
Future Generation Investment Company (FGX)
Future Generations is a listed investment company (LIC) with diversified exposure to Australian equities and it also supports Australian children’s charities, with a focus on children at risk.
Set up as a fund of funds, Future Generation Investment Company offers investors access to 14 fund managers in a single investment vehicle, including funds that are now closed and wholesale funds not open to retail investors.
There are 0.0% management fees and 0.0% performance fees as these fund managers have agreed to provide capacity to the company in their managed funds at no cost. The company has few expenses as many suppliers are also donating their services. This pro bono support will allow the company to donate 1.0% of its assets to children’s charities each year, thereby investing in Australia’s future generation.
FGX launched on the ASX in September 2014 and has been performing well. The portfolio has been invested with 14 of Australia’s leading fund managers with the allocation of strategies to allow the company to deliver on its investment objectives of providing a stream of fully franked dividends to shareholders, protecting their capital and delivering capital growth.