New stock ideas can come from all sorts of places. Sometimes you stumble across a new idea when researching another stock. The CEO might endorse a supplier or customer, or better yet, give credit to a competitor. For example, shopping centre managers are a very good source of identifying which retailers are performing best, and retailers will know which particular products are selling well. To the extent relevant, we will follow companies listed in overseas markets to gain insights into ASX-listed companies. One unusual case recently was a company we followed that had been listed on the New Zealand Stock Exchange for some time, Michael Hill International. The company actually changed its listing to the ASX, and this meant that we could buy it for the funds at a time when it wasn’t well known or covered.
Firstly, we are looking for certain attributes that give us confidence to invest. Generally, we are looking for quality companies that are growing nicely. Ultimately however, we are looking for a company whose prospects are better than what is perceived by others and therefore implied in the share price. The idea is to tilt the odds of investment success in our favour. If it is a new idea, or even an old one, we will undertake very extensive research to understand the company, its competitive position, risks and opportunities. Most importantly, this involves meeting with management and other industry players and experts. We’re looking to identify something important that has been overlooked or isn’t fully appreciated, typically relating to business quality, growth options or general prospects. Investing then comes down to our levels of conviction around the downside risks and upside potential of any particular stock, and to this end, new ideas will have to compete with existing holdings.
Michael Hill International is a recent addition. It operates the Michael Hill jewellery stores in Australia, New Zealand, Canada and USA, and a new store format with Emma & Roe. Because it had been listed on the NZX for some time, it has a long track-record from which it can be judged. It’s a high quality retailer, with good profitability, a disciplined store roll-out plan and other growth plans, and in our view, a very capable management team. The opportunity presented because few were looking at it, which meant that the strength of the business and management, as well as its solid growth prospects here and overseas, were underappreciated, and its shares accordingly traded at an attractive valuation.