Patience pays bigger dividends

While markets are often dominated by noise, short-term speculation, and shifting sentiment, consistent outperformance comes from a willingness to take a long-term view. As Ryder Capital’s listed investment company (ASX: RYD) marks its 10-year anniversary, we’ve seen firsthand how patience, coupled with strong conviction, delivers superior returns.

Finding mispriced opportunities

Our focus is on shifting the odds of success by finding mispriced stocks trading at a significant discount to their intrinsic value. 

This often means looking where others aren’t - to outperform the market, you cannot just follow the crowd. 

Instead, we focus on finding quality companies that have been overlooked or find themselves temporarily out of favour. We find mispricing is most prevalent at the smaller end of the market, where companies are under-researched, have more dynamic earnings, and often fall outside the scope of the increasing number of index-aware passive managers and ETFs. 

By taking the time to dig deeper and understand the long-term potential of a business, we can identify compelling opportunities ahead of the market.

Understanding the market

The market reflects the collective judgment of many intelligent and informed participants; the challenge is not just spotting when the market has mispriced a stock but also understanding why our view is likely to be correct against other informed perspectives.

Quite often, we do the work on a stock only to keep it in the back pocket for when a mispricing opportunity emerges, a recent example is our position in Fleetwood (ASX: FWD). In mid-2024, a combination of short-term earnings challenges and a shareholder becoming a forced seller created a significant disconnect between the market price and the company’s intrinsic worth. 

With 25% of the market cap backed by cash, providing strong balance sheet support and having previously done the work on the company, we were comfortable to look through the earnings downgrade, believing it would be temporary. 

Meanwhile, the market focused on historical issues and remained overly sceptical of a forecasted step change in earnings from FY24 to FY25, with EBIT increasing almost 5x during this time from $8m to $38m. 

We acquired a substantial position at ~$1.30 and have since seen a material re-rate in the share price to over $3.00 per share, whilst also receiving ~20% of our cost base in dividends.

As a value investor, it is often all too easy to buy into a value trap where a stock can continue to remain cheap without a reason to re-rate, hence identifying a clear catalyst is a key part of our process. 

In the case of Fleetwood, the upcoming earnings turnaround and corresponding increase in dividends provided exactly that and ultimately drove the re-rate, closing the valuation gap.

The discipline of high conviction

Running a concentrated portfolio making high-conviction investments requires research, discipline, and patience. Our diligence process is exhaustive with our deep research allowing us to build conviction and back companies we know inside-out. 

However, remaining humble is critical to adapt to changing circumstances and new information. While it is important not to be distracted by short-term sentiment, we continuously test our assumptions to ensure we are not missing something the market has already priced in.

Ultimately, everything comes down to valuation. We only invest when there is a substantial margin of safety between the share price and our estimate of intrinsic value, with limited downside risk. 

Protecting capital matters just as much as compounding it. 

Chasing momentum at the wrong time can destroy long-term value, and we are comfortable knowing we may miss some exciting opportunities because we are not willing to accept a higher level of downside risk.

Selling at the depths of negativity can be just as value-destructive. Had we done this with our investment in Macmahon Holdings (ASX: MAH), we would have missed a ~270% return over the past three and a half years (from $0.13 to $0.45 plus dividends). 

In 2023, after several years of heavy capital investment, no free cash flow and widespread pessimism in small caps, the share price had almost halved from our entry point. While the market had written off both Macmahon and much of the mining services sector, we saw very little downside with the stock trading at 50 cents on the dollar of hard asset backing with a clear pathway to free cash flow generation led by a strong management team who had set the foundations for capital-light earnings growth. 

We recognised the mispricing, assessed the downside risk, and used this information to take advantage of a fantastic opportunity. 

It took time, but patience was rewarded as the company delivered on its strategy and the market caught up, reflecting this in a materially higher share price.

Patience rewarded: SRG Global (ASX: SRG)

Our investment in SRG Global is an example of our long-term investment strategy in action. We first invested in 2019 at 40 cents when SRG was a $150 million company with the majority of earnings coming from its construction division, largely concentrated on the West Coast. 

Whilst the market remained fixated on SRG’s history, labelling it a cyclical contractor, our process identified a quality company with a clear strategy, strong balance sheet and excellent management team driving a transformation towards a national, diversified infrastructure services business with a recurring revenue base. 

Fast forward to today, at a share price of over $2, SRG has grown into a $1.2 billion company with a significantly higher-quality earnings profile generated from long-term annuity-style contracts across a range of maintenance and industrial services.

The journey was not without challenges, with a material earnings miss, project delays, and the impact of COVID, all creating periods of uncertainty. We assessed each as a temporary setback and, in many cases, an opportunity to add to our position at very attractive prices. 

While we could not perfectly time every catalyst or event, our discipline and long-term approach ensured that the ultimate reward far outweighed any imperfection in timing.

The next opportunity in focus

While we’ve reflected on some of the lessons and successes of the past decade, it’s just as important to share how we’re thinking about future opportunities. With a number of positions in our portfolio looking highly prospective, it's hard to call any one name out; however, our investment in Count (ASX: CUP) represents an exceptional opportunity for long-term compounding growth. 

With a strong strategic position in the fragmented accounting and wealth management sector and a high-quality management team, Count is well placed to drive consolidation. The company has been steadily expanding its adviser network and scaling through accretive acquisitions, most notably with the recent purchase of Diverger — a deal that brings material synergy benefits and new revenue streams. 

Count’s scale and integrated offering provide a clear competitive advantage, while its equity partnership model creates strong alignment across its network of firms.

At a market cap of $175m, Count remains small and overlooked by many managers, with its corporate structure requiring extra effort to fully appreciate its underlying earnings and value. Trading on just 10.5x after-tax earnings, we believe it is too cheap for a high-quality business with sticky revenues, strong cash flow conversion, and both organic and acquisition-driven growth opportunities. 

In our view, the market is underestimating its earnings potential and placing too much weight on a potential stock overhang from long term shareholder CBA. As Count continues to demonstrate earnings growth and unlocks the benefits of scale, we expect the market to re-rate the business accordingly and while we wait, we will be paid for our time with a healthy stream of fully franked dividends.

Over 10 years we have meaningfully beaten the market, learning that patience, discipline, and conviction are the cornerstones of long-term value creation. 

Markets will always be noisy, but true results come from filtering out the distractions, backing deep research, and allowing time and process to compound returns. 

This article was co-authored by Peter Constable (Founder and Chairman of Ryder Capital)