How Forager turned a SaaSpocalypse stock into a 50% gain in four months

"AI will kill some and make others better businesses, and sorting one from the other was a major focus for the team this year," Brown says.

That search led Forager to UK accounting software provider Sage Group and several high-quality Japanese software and consulting firms. It also produced one of the team's best trades of the year: website builder Wix.com, which Forager bought in early July and sold by the end of October for an average gain of 50%.

In this Q&A, Brown explains why European banks still look reasonably priced, how Forager trades around its long-held position in MTU Aero Engines, and why he sold US building materials distributor Builders FirstSource at a loss. 

He also shares why emerging markets are on his radar, now trading at their cheapest forward price-to-earnings multiples in 15 years.

Forager often looks to invest in good businesses experiencing headwinds. What is the latest example and how do you evaluate these opportunities?

That led us to Sage Group (LSE: SGE), whose accounting software is deeply embedded in its customers' businesses, and to several cheap, high-quality Japanese software and consulting firms.

Wix.com (NASDAQ: WIX) didn't tick every box. It helps customers build websites without coding, and AI alternatives are a genuine threat. But fear of that threat made the stock too cheap. We bought in early July and sold out by the end of October, for an average gain of 50%.

You have a particular focus on Europe, what are you currently watching in this market?

We also follow MTU Aero Engines (ETR: MTX) closely. It's a risk and revenue-sharing partner on major aircraft engine programs, an industry that will grow for decades. We first bought in 2023, after a partner's usage of contaminated powder metal halved the share price. It wasn't MTU's fault, but it cost the company real money. 

We've held a position ever since, owning less when the market is buoyant and more when it's pessimistic. Most recently we've been adding, as fears about war in Iran and high oil prices weighed on the stock.

What is the most recent investment you have trimmed or sold and what drove this decision?

Builders FirstSource (NASDAQ: BLDR) is one of the largest distributors of building materials to US home builders, selling everything from windows and frames to roof trusses and insulation. The industry has consolidated heavily over the past few decades, with more to come. 

The stock will do well over a full cycle, and much better if you time the cycle well. We didn't. We bought much too soon. Higher interest and mortgage rates mean fewer new homes, and that hits profits hard. We sold the stock at a loss, but it remains firmly on our watchlist.

What’s your favourite chart or data point from this week?

Emerging markets, measured by their forward Price-Earnings ratio, are the cheapest they’ve been in 15 years. Over most of our Fund’s existence, we’ve owned no emerging markets investments. Today we own a little. We may end up owning more. This chart illustrates why we’re looking closely.

What was your weekly high – a standout market moment or highlight?

Market concerns about megacap valuations and their AI investment plans has highlighted the role we want to play in our clients' portfolios. A few strong months for our portfolio while the market struggled shows that there is still a place for something different. Perhaps a stronger case than ever.

What was your weekly low – a market disappointment or challenge from the week?

Strong relative performance is always a challenge for us. Six months ago, betting against the AI bubble and on some high-quality software companies was a fairly obvious trade for us contrarians. At today's prices, the argument is more balanced and the next portfolio move is less clear. 

What first drew you to markets and what continues to keep you inspired today?

What’s one piece of advice you’d give to new investors?

Becoming an investor takes one action. Don’t sit on the sideline. Being a good investor means time and effort, but you need to start somewhere. Do what you need to do to get skin in the game. Eat only house brand cornflakes for a month if you need to in order to raise table stakes. You won’t be the first to have done it, trust me. You’ll find out quickly whether you enjoy the hunt or should outsource to an index fund or manager. Either way, keep investing.

How do you unwind when you’re not thinking about the market?

Rapid fire! 🔥

What is your favourite investing book?

Common Stocks and Uncommon Profits by Phil Fisher. I first read it 30 years ago, and it was already old.

What is your favourite investing or finance/markets-related podcast?

These days I’m more likely to be listening to podcasts on science, technology, engineering, history or anthropology.

What’s the first thing you read each morning?

What is your favourite restaurant?

Louie in Coogee - take a small group and share dishes. Kaiser Stub’n in Terrey Hills for when my wife gets homesick for Austrian food.

What’s something people are surprised to learn about you?

My pointless party trick is that I can name all 50 US states without looking at a map.

Think there’s a better pick? Prove it. Share your rapid-fire book, podcast, and daily read in the comments.

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