Quality and growth: How Ben Clark consistently finds winners

The Rules of Investing

Livewire Markets

Consistency is key to successful investing. Just ask someone who invests in speculative mineral explorers – they’ll likely be able to tell you about their big winners but might be less keen to discuss their strike rate. But even getting 60% or 70% of your picks right is enough to produce outstanding performance.

That’s one of the reasons Ben Clark from TMS Capital has done well, both on Livewire and in the High Conviction Fund that he runs. Regular Livewire viewers will recognise Ben as a regular guest on Buy Hold Sell and our annual Outlook Series. Not only did he win Livewire’s "Don Bradman award" for the most consistent stock picker on Buy Hold Sell, but he also topped the Fundies’ Picks in our 2020 Outlook Series.

So, with just a couple of episodes of The Rules of Investing remaining for 2021, I thought it was about time we got Ben on the show to better understand what makes him tick.

In this episode, we learn about his approach to investing in quality growth stocks, Ben shares his views on the Afterpay/Square merger, plus we discuss several Aussie stocks that he thinks have outstanding opportunities for growth. 


Timestamps and topic discussed

  • 2:52 - What caught Ben’s attention when he first became a Livewire contributor?
  • 5:06 - Who is Ben’s favourite Livewire contributor?
  • 8:02 - An introduction to TMS Capital and the TMS High Conviction Fund
  • 10:40 - What differentiates good versus poor quality growth
  • 12:38 - What sort of growth investor is Ben and how does he approach valuing growth companies?
  • 18:45 - What are the contrasting themes between Aussie and American growth names?
  • 25:20 - What are the benefits of the merger between Square and Afterpay
  • 32:49 - Ben’s opinion on Touch Ventures, a listed venture capital company
  • 37:33 - Is Link Administration Services an example of a potential turnaround story?
  • 41:33 - Does PEXA still have upside?
  • 46:00 - What is a stock that everyone will be talking about over the next 5 years and produce the highest levels of growth?
  • 52:40 - Ben answers our three favourite questions.

Book recommendation:

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Edited transcript

Poke

Hi Ben. Welcome to the show. Good to be finally chatting with you.

Clark

Thanks Patrick. I've listened to a number of your episodes. I'm doing a Saturday walk, so it's nice to be on.

Poke

Yeah. It's been a long time coming. I think you were actually one of the first contributors I met when I started at Livewire in Sydney five or six years ago. So I felt we were a bit overdue.

I thought coming up to the end of the year it would be nice to get somebody who'd been a long-time supporter on the show.

Clark

It's been great watching the growth of Livewire. It was a much smaller vehicle back then, and you guys have done really well to grow it so fast. It's turning into a real beast in the market.

Poke

Yeah. Over the years, we've grown by so many multiples that I can't even remember what the exact number is now since I joined, but, yes, it's been really exciting to be part of a company like this.

What caught your eye about Livewire, though? As you said, it was a very small company.

We didn't have a massive audience when you first joined. So there must have been something you saw that caught your attention.

Clark

Initially it was Jimmy Marlay. He was a year below me at school, and I've been on a couple of surfing trips with him. He came and saw me just as he and Tom were starting up.

I gave him feedback on what I thought, but Jimmy did a great job. He was at BRR before Livewire, and did a great job growing that business. I just thought they had a really good chance of striking a chord.

When he asked me, "Ben, could you put some content up or could we have a chat too, or do anything like that," I was more than happy to.

I like the idea of the democratisation of what's going on in the market. Twitter I know is a great source of information, but it's pretty toxic as well.

The thing I do like about Livewire is it just seems like a really healthy sounding board for people to give ideas, to get feedback, to challenge the way that you're thinking.

I've seen the journey Livewire has taken. Probably the biggest selling tool you guys have got is — not that I'm selling myself here — but the quality of the people and the contributors you've got. You can get some high-quality content in a short period of time.

Poke

It's pretty amazing some of the people who contribute to this site now. We've had a few pretty high-profile ones over the last few years.

We had Cathie Wood on the platform before she got famous, I like to think. Then more recently we've had Jeremy Grantham. Pretty much everybody in the Australian funds management industry now is on there.

I'd be curious to know who's your favourite contributor or author. Of course, that doesn't mean you don't like anybody else. This is not a slight on anybody, but is there anyone that stands out for you?

Clark

One person I do follow pretty closely is Rudi Filapek-Vandyck. I used to do a fair bit of stuff previously with him, so I know him well, and I've always found him probably a bit left of centre in the market, but he's got a really good sense of what drives markets, and how markets behave, and what they look for, and looking at what's going on within the market.

If you listen to some of the posts Rudi does or read some of the things, there's common-sense stuff in there, but it really gives you a good feel, I think, for why share prices move; why they sell off on what can seem like good news or potentially bad news. So I think he's been a good proponent.

Emma Fisher at Airlie Funds Management, I follow. We're probably going to talk about this later.

You know what? I'm a very enthusiastic growth investor, but I've often found that when — not that I would say Airlie would want to be called a hard value manager — but when value and growth aligns, when a value manager or more traditional value manager comes to potentially a growth stock, there's often something to look at there. So it's always interesting listening to her content.

Some of the Hyperion Asset Management guys as well we follow really closely. Mark Arnold I know has been putting up some content more recently since they listed their global fund. I think he's been an invaluable source of information to me.

Again, I think everyone brings different qualities and different ways of thinking onto the platform. When we meet up with the Hyperion guys, it's just this very long-term, unemotional way of looking at the businesses that they own and where they're headed.

You just try and let a little bit of all these attributes rub off on you and keep listening and keep taking it in and, hopefully, it makes you a better investor.

Poke

I like to think so. If any of the quality of the guests that I speak to rubs off on me, then it must make me a great investor. So comment on them, not me, by the way.

Clark

Surround yourself with good people.

Poke

Yeah, yeah, yeah. Emma Fisher was a lot of fun to speak to. We had her on the show earlier this year, and it was a really, really interesting episode. We're both fans of Formula 1, so it gave us some common ground to work from there.

Before we get into the discussion — I know we're going to speak a lot about stocks today — I just wanted to give you an opportunity to talk about where your strategy fits in with TMS Capital.

We're going to be talking about, obviously, a fairly small part of your business. I thought you might want to tell us about the other things you do as well, so as not to give a skewed representation of what you guys are about.

Clark

Thanks, Patrick. TMS was started back in 2005, and I've pretty much been there since day dot. Our core offering to clients is that we manage money on a non-discretionary basis on their behalf.

A client might come to us and they've got a pool of funds, and every client has different goals and objectives that they're trying to realise in approaching a business like ours. We will manage that money on their behalf.

We'll invest in things like debt, infrastructure, property. We're very active in hybrid markets, as an example, and, of course, in Australian and international shares.

We employ, particularly locally, a barbell approach in terms of managing money, where we have a collection of what we think are fast-growing, long-term businesses that could do very well from a growth point of view, and that might be offset by things like infrastructure stocks, businesses like Soul Pattinsons or Wesfarmers, which have been long-term holdings for us, where there's a nice income stream and there is growth, but it's not going to be at the hyper levels that some of the other businesses are experiencing.

That's done on a client-by-client basis in terms of allocation. The fund that I've been running for six years now — the high-conviction fund we termed it — is more on the growth side of that barbell.

It has been put together to look at what we think are some of the best-quality growth stocks we can find in our market. It doesn't mean they've got to be the fastest-growing businesses.

I put much more emphasis on the quality of the growth rather than the speed of the growth. Certainly, what we'll be talking about today is more focused on that side of our company.

Poke

What do you mean by the quality of the growth? What is good-quality growth to you as opposed to poor-quality growth?

Clark

Probably the recurring nature of it would be the main theme, I would say. If you look at a business like WiseTech, its customer attrition rate is less than 1% per annum.

So when you look at the revenues WiseTech earned last year, more than 99% of that will almost certainly occur again next year. If you look at an offshore business that's similar to that, I would say Salesforce has got one of the highest-quality growing businesses I've come across.

Of course, you've got other companies which can experience strong periods of growth, but they're not necessarily recurring.

We've got stocks in this portfolio which I would single out, like Appen, which would be an example of a business in recent times that has experienced a pretty decent hiccup as a result of what you would probably call the quality of the growth.

The Australian share market is littered with businesses that can go through periods where they are growing strongly, but it's how long they can continue to grow at those rates is what I would earmark as the quality of the growth.

Poke

Yeah. We've certainly seen over the last few years a few great examples of companies that have gotten the market very, very excited for a period of time, only to severely disappoint them later.

I think the one that always sticks in my memory is Blackmores. I remember at one point Blackmores was being discussed in the same light as CSL, which seems silly now, but five years ago, everybody thought that that was reasonable.

I remember they were both racing for $100 a share at around the same time. Obviously, one of those companies has done a lot better since then. Do you consider yourself, though, to be a pure growth investor or more a growth-at-a-reasonable-price type approach?

Clark

Both approaches, I think, are completely prudent. I just think it comes down to what the level of growth you're expecting is and what the quality of the growth is. Everything has its price, right?

Some businesses are growing really fast, but you look at it and say, "Oh, is that really sustainable?" Therefore, you have to apply a multiple to those earnings that you believe reflects the uncertainty of that. Other companies are growing year on year out, and the growth is highly sustainable, and a different multiple needs to be applied.

I think it really comes down to a company-by-company view, Patrick. If I look at some of the businesses outside this portfolio that we've been invested in for well over a decade, they have been some of the greatest compounders of capital that you've seen.

I mean, Soul Patts and Wesfarmers, examples, have been extraordinary businesses. ARB Corporation, Reece Plumbing — these businesses might not look as exciting on the outside, but they have delivered over many years.

You've got to weigh up what you pay for the quality of that company's earnings. So I tend to think, when you say growth at a reasonable price, it's based on what that growth looks like.

Poke

Do you have a single way of valuing or pricing growth stocks or have you got to take more of a bespoke approach for each one?

Clark

I think you can't apply one formula across different industries or even different businesses within an industry because you've got to do your work on that specific business, and then you've got to think about what you'd be willing to pay for that.

I mean, in terms of an approach that we take, one thing I think that has served us well, because we are having a conversation now about something which has been this raging debate in the Australian share market for a number of years now, which is we've seen the hyper share-price growth of a number of these businesses.

There's been plenty of argument about, "Are you mad to pay the multiples that these companies have traded on through their journeys that we are seeing PEs (price/earnings multiples) that we've never seen before?"

It has been a divisive issue and there's been a lot of debate around it. It's actually one of the reasons I think a lot of these stocks have done so well. If it was obvious to everyone much earlier in the journey where they were going to get to, they wouldn't have been so mispriced in their early stages.

So if I follow on from that, I think looking at global comparables has been something which has been a good technique for us just because I think a lot of the companies that we're discussing — and I think most of the listeners won't be familiar with them and I could reel off five or six names — you just haven't seen companies like this on the Australian stock exchange before, and there's no one really to line them up against and say, "What should I be paying?"

If you look to places like America or the NASDAQ in much, much deeper capital pools, we have much more experienced investors who have seen these businesses for longer periods of time, in much greater quantity, and have probably got a lot more experience in terms of saying with their own money what they think these companies ultimately are worth.

That has been something that we have tried to employ, where we've looked offshore, looked at what we think is a business that's similar.

Just to rattle off an example here, WiseTech and Salesforce, even though they're in very different industries, there are similar characteristics, extremely high recurring levels of income, but I think the most important thing is they've effectively come into these huge addressable markets where they're really the only player.

WiseTech doesn't have a competitor. WiseTech's competitor is a logistics or freight-forwarding company running their own platform internally, which they use to monitor the movement of all of their parcels.

When you think about Salesforce, the exact same thing was the case over the last decade or two. You might have had ANZ running its own CRM (customer relationship management) internally and had a whole team of IT professionals working on that, and constantly having to try and update it, and keep it as relevant as it can for its employees.

How do you value a business that was willing to lose a significant amount of money in its early journey to show to ANZ that it could take on ownership of the platform, do it in a far superior manner and probably do it cheaper? That's effectively what WiseTech's done.

If you look at Salesforce 10-15 years ago in the US, there was almost an identical debate about what you pay for a business, as we've seen with some of these other ones here.

It's probably because the durations that we've seen have been significant in a number of the names that we might talk about, but it's probably given us the conviction that this is a way that others have invested, as I said, in probably more mature markets, and it gives us a bit of a benchmark as to how we should.

Poke

What are you finding generally as you make those comparisons between Australian stocks and the US stocks?

Are you seeing any persistent themes of one market or the other being more expensive or cheaper, or favouring particular markets, or is there actually a fairly efficient pricing across the two markets these days?

Clark

I think it's getting more efficient. When you see the share-price behaviour of some of the faster-growing businesses, when you look at the short-term financials, there's more room for volatility because they're a lot more extreme.

I think we saw that with a lot of businesses in this area in the US probably a decade ago, and they've probably, as time has gone on, they've moved on from that.

If you look at a company like Atlassian as an example in the States, technically, it's still loss-making. I think it hit an all-time high again last night and is fast becoming one of the biggest businesses in the world. You certainly haven't seen the volatility in the share price over there that we tend to see in some of the stocks that we have over here.

I think Australian investors, probably more at an institutional level, have been more reluctant to embrace some of these companies earlier in their journey.

From what I hear from when I speak to some of the guys, the asset consultants can be nervous about it as well, because they look at some of the larger holdings, potentially, and they're like, "Wow! Everyone says that's way overpriced. That seems like a big risk to the portfolio."

So I think there's layers of reasons why we are still probably a bit behind some of these more mature markets, but I definitely think we're catching up.

I think Afterpay, more recently, was a good example. They're a firm which was listed in the US. What really struck me about the Afterpay journey was that I think Eley Griffiths was the only Australian shareholder that was substantial at some stage along the path, which is really unusual.

When you think, it did make the ASX 20, and there wasn't one Australian fund manager that was substantial, but there were venture capital funds, US hedge funds and US mutual funds that were significant holders on the register.

Maybe that's an indication that we're earlier on in the journey of looking at these businesses.

Poke

Yes. It was an incredible amount of scepticism about Afterpay all along the journey. I have to admit I'm guilty of some of it myself, but we've seen many examples, particularly over the last 10 years, or maybe that's just because we've not been paying the most attention to those stocks that just look expensive.

Everybody complains about them being expensive, and they just keep going up. I guess the best example is probably Amazon.

Clark

Yeah, absolutely. Amazon's probably an example of looking back and saying the market got it absolutely right, because when you look at it today, the multiple does not appear demanding by any means versus what we're paying for our strong growing businesses.

I think last time I looked, Amazon was trading on an EV/EBITDA about 22 times. Given the incredible growth runway they still have, I think it's got to be one of the best businesses you can own in the world.

Doesn't seem to me to be overpriced by any means. I think it was in — correct me if you know the answer — but I think it was in 2017 when they technically recorded their first quarterly profit. Not that long ago. The share price, of course, had run extremely hard for years leading into that quarter.

I think in some ways, what we're seeing with Tesla in the US is a similar example, where it still looks very expensive, but each quarter that they keep reporting, it's looking not quite as expensive as the quarter prior, despite what the share price has done.

I think for listeners out there, don't immediately discount businesses because they appear on the outside to be too expensive. From my experience, share prices generally are going up for a reason.

The market is normally more right than wrong — not to say it's always right — but what we have seen with a number of these companies, ultimately, is the weight of money could see the future.

There's littered examples along the sidelines of ones that didn't make it that the market thought were on the same path. You've really got to do your work and you've got to try and build your own conviction as to what you believe you should be paying.

I'm going a bit off the topic here, but the market has an extraordinary ability, particularly with growth businesses, to test your conviction of how strongly you believe in that company, and to find your pain points and to squeeze them, and to really make sure that you want to own that stock.

I think what you find is that the faster the growth, the more frequent and the more severe the corrections you get in that share price along the journey, and it keeps testing your mettle. It's what makes growth investing fascinating to me, but it's also what creates a bit more of a stressful environment.

Poke

Shaking out the paper hands, as our friends on Reddit say these days. Let's get into talking about a few stocks. I wanted to start with the most talked about stock in the Australian market probably in the last five years. That, of course, is Afterpay.

I'm sure it's not news to anybody listening here that Afterpay is in the process of being taken over by Square. I know Afterpay was certainly a company you owned before that takeover. Is that right?

Clark

Yep. That's right. We started buying it in, I think it was in late 2018. It's certainly an outlier I've never had, and I don't think I ever will in my lifetime have a share price that's done what it's done.

I think it's risen over 2,000% during that period. It's been an extraordinary ride. And as I was alluding to earlier, it's given you plenty of reason along the way to question your conviction in it.

Poke

What about that drawdown last year? Wow.

Clark

That's still ingrained into my memory. I think sub $10 at one stage. There was some beating drums out there, but, yeah. The Square takeover, it looks outstanding.

Poke

Do you want to keep owning that stock post-merger? Is that outstanding for Afterpay shareholders? Is it outstanding for Square shareholders or both?

Clark

I think it's going to be both. The plan is to hold the combined company. It probably shows how boring my life is, but I'm very excited about having a business of Square's quality listed on the ASX.

I really think it's going to bring something new to our market, and hopefully it stays on our market, because we have seen a couple of these ones that have fairly quickly disappeared.

I listened to (Twitter CEO) Jack Dorsey on the recent earnings call discussing what he felt were the benefits of the Afterpay merger. It's interesting.

Afterpay has been so frequently talked about in Australia. A lot of the US analysts hadn't even heard of it when they initially raised the acquisition announcement, and there's a lot of questions around it from analysts over there.

We are still doing work on Square because it's not something we've looked at too closely in the past. I think from an outsider looking in, Square appears to be a peer-to-peer business which has now got 60 to 70 million Americans using the cash app.

We know they've got the hardware terminals as well that we're seeing cropping up in Australia and certainly over in America, but it's really that cash app where they're effectively becoming a bank for millennials.

What they have caught onto is providing a tech platform where you can get your salary paid into it, you can park some of that money in Bitcoin or in the NASDAQ or in the S&P 500 if you want to, you can transfer money really easily to your friends or to others if you need to, you can do all these really cool stuff around savings goals, et cetera, et cetera.

Square actually is a US-registered bank. It's one of the big disruptive forces that is coming to the banking industry. We know that Afterpay already was going down this channel themselves before this merger was announced. They were creating Afterpay money.

The Square cash app, I think, will some way or another merge in with that and Afterpay money might disappear in name at some stage, but it's not inconceivable in a year or two even that you will be able to get a home loan through Square/Afterpay, and you will completely bypass what the banks are able to offer you.

I think it's a real warning when looking at some of the blue-chip businesses in this country. We've heard the term "disruption" thrown around for the last five to 10 years, but I think we are really hitting a tipping point.

The banks are still 20 odd percent of the Australian share market, and it's not going to be something that's going to happen overnight, but I do think the writing is on the wall.

You've got some incredibly good operators who are willing to invest very aggressively in these businesses and do things completely differently that are going to attract a lot of customers and potentially eat the bank's lunch.

CBA (Commonwealth Bank), appears to be really onto it, and they're going down a similar path and they can see what is coming, but you do worry that there are others out there that really could be vulnerable to it over the next decade.

Poke

Is that Klarna that you're referring to there with CBA?

Clark

Yeah, I think that, but also, CBA is very aggressively investing into their tech deck. I think Matt Comyn last week or this week announced that CBA customers are going to be able to put money into Bitcoin through the app.

This is the path you've got to go down. You've got to stay relevant, and if you don't, people will take their business elsewhere.

In the past, there hasn't been anywhere else to take your business. There really hasn't been a competitor that can do what the banks can do, but maybe in a more consumer-friendly way.

We're seeing multiple businesses which are looking at these small, very profitable parts of banks' businesses where they're earning probably oversized margins, and thinking of ways that they can attack them, and that might be in forex (foreign exchange) conversion.

I look at a business like Tyro, which provides probably the second-best point-of-sale hardware solutions to business customers. You can now actually have a Tyro bank account.

You can borrow money through Tyro and all the merchants you speak to really rave about how easy and how good the service is. I think it's just a reflection of what is coming.

I'm getting off the topic, but at this stage, we are planning on sticking with the combined Square/Afterpay entity. I think there's still going to be a lot of growth to come here.

Bear in mind, Square really operates in, I think it's three countries. I think Australia is actually their second biggest market to date globally.

Poke

Really? I didn't know that. I assumed that they were as big everywhere as they are here and the US.

Clark

No. I'm pretty sure that's right. I think outside of America we're their next biggest market, but I'm sure we won't be for long.

Poke

No, no, no. It seems as though fintech has just been a buzzword for so many years. It feels like the industry is finally maturing to a place where it can actually have an impact.

Afterpay, of course have, well, not Afterpay themselves, but they have invested in another firm called Touch Ventures, which listed recently.

I'd be curious to get your view on that. I'm not sure if you own it or not. Did you participate in the IPO? Did you have a look at it? Did you like what you see?

Clark

Yup. It was a fairly small raising and we did get it. We actually bid for a small allocation and got some early scale back, but we did retain some shares in it, and it did what you so often do see.

I think it nearly doubled the first day that it started trading and it's actually now trading under the IPO price. I think some of the hot money chasing the Afterpay story then realised this is going to be a long, slow burn. There's definitely some characteristics there, Patrick, that I think look attractive.

The best way to think about Touch Ventures is it's like a listed venture-capital company. It came to the market with, I think it was five investments that have been made over the last few years, four of which have been originated by Afterpay, and effectively leading into this merger with Square.

What they've decided to do is spin off those investments as a standalone investment vehicle. I think they're hoping to get to about 10 within the company. They announced they've done a small raising with Till, another fintech digital payment business.

What's attracted us to it is that from a Afterpay perspective, they are watching. They would have so much data coming through that platform now where they can see on a day-to-day basis trends that are emerging, and the same thing would be happening with their merchants that they're talking to and they're seeing. They would know where there's some pain points, I think, in the experience.

What they've been doing is looking to find some startups — or not even startups, but companies that are going along that journey that can solve those pain points — and potentially Afterpay can help hyper scale the growth they're experiencing.

You've got, I think, what would have to be two of the best operators that we have seen in this country in this part of the industry who are effectively helping nurse these businesses into more mature states.

From a founder point of view, we know the venture capital market is red hot. It's not just here, it's all around the world. There's a lot of money that's being given to venture capital fund managers.

The biggest challenge, we hear, is finding the right businesses to invest that money. There's not as many future Afterpays as obviously as you think.

I just think for a founder, when they're choosing who they want to bring onto their register, you couldn't think of anyone much better. You're going to get the expertise.

You're going to be brought into an ecosystem which is experience hyper-scale growth itself, and you're going to come onto the radar of a lot of other investors, which will probably mean when you do subsequent funding rounds, it's going to be on more attractive multiples and it will help accelerate the speed of the growth of the business.

From an outsider looking in, it looks like a win-win to me. These things do take time. There's a couple of other examples, like Bailador, that I think are fairly similar, and Thorney Technologies is probably another one that can invest in unlisted with a plan to bringing them through to an IPO.

The thing to bear in mind is that you're really only going to see value come through the listed portfolio as subsequent funding rounds occur and existing investments are revalued to up-to-date market valuations. The time between those funding rounds can be several years in some cases.

So Touch is really, I think, maybe a bottom-drawer one, and one you wouldn't probably want to have a huge allocation to, but I just think it makes a lot of sense.

I think four of these investments were done some time ago by Afterpay. So I'm sure that they're showing some merit. There's some great people on the board and involved in Touch who will be bringing these companies along.

Poke

One of the companies that stood out as I was looking over some of your holdings was Link Administration Services, as I think they're called now.

The company has had a challenged history since listing, and you never really struck me as a turnaround investor. Is that what you see it as, or am I looking at this the wrong way?

Clark

No. There's several companies that we own at the moment that are going through various issues. I think that's just the reality of when you've got 20 odd stocks in your portfolio, and Link is up the top of the list.

What initially attracted us to Link, and I think we've probably been in there for about three years or so now, was the PEXAbusiness that they were building out.

What you had was a mature, low-growth company. There wouldn't have been much to attract us onto the register, but they kept showing the numbers of this PEXA division that they were a shareholder of. Wow. PEXA has been an extraordinary success story.

PEXA was put together by Macquarie. Macquarie is one of the biggest holdings in this portfolio, and it's just Macquarie at its best, I'd say, where they brought the various state governments together.

They said, "Look, let's digitise the land titles offices that you all own, and in return, we'll give you equity in the vehicle." The banks they brought onto the register as well.

To speed up the adoption of digital property settlements, you really needed the banks on board. Link were there as they provide a lot of custodial services so they can do the back-end administration stuff.

That consortium has changed over the years. Governments sold out. All but CBA sold out over that time. PEXA was just becoming bigger and bigger in size.

Although there's attributes of the remaining Link business which I think look very cheap, but are probably not what we'd normally go for, it was being dwarfed by the success of PEXA, and at the time Link was the only way to get exposure to PEXA.

Where it hasn't played out is that, PEXA has been IPO'ed, and Link is the largest remaining shareholder in PEXA. I think you could ascribe about two-thirds of Link's market cap to its PEXA holding.

The frustrating part has been that the core business has held the unbelievable growth of PEXA back. It's probably another conversation for what we think is going on there.

I would say it just doesn't feel like there's been a clear strategy from Link. They were talking about selling down PEXA a year or so ago to start returning cash to shareholders.

Then they were talking about potentially passing through the PEXA shares to shareholders, and then we got to the IPO and they were actually talking about investing further into PEXA.

So I think there was a real muddled message through that. I know they're talking up the other part of the Link business as offering five-year, longer-term, aspirational, strong growth rates, but I just think the market is not buying it.

Of course, we've seen a takeover bid for them late last week. I think that says there's value there, but it's been a frustrating one, Patrick.

Poke

What do you think of PEXA as a separate business now? Are you considering buying shares in PEXA or has that growth story largely played out?

If I'm not mistaken, PEXA already processed something like 97% of the property settlements in Australia. Is there still upside left in PXA?

Clark

I think there is still upside left in PEXA. There is a lot of adjacencies that PEXA could bring on their platform, which make a lot of sense. They're an incredibly high margin.

We've gone through a period where property settlements have been very low versus historical levels because of a roaring housing market, because of COVID where auctions and in-house inspections have been disallowed.

So the actual volumes of properties transacting over the last couple of years have been abnormally low, which has affected the PEXA business.

The question mark with PEXA in turn from Link is they are now eyeing off the UK and looking at trying to do a similar feat in the UK that they've done in Australia. My view is the market is really in two minds about that, where I think they had a really clear run at it in Australia.

There's going to be more competition from day dot in the UK. They're going to have to sync a fair bit of capital upfront to try and get this business up to a scale that it will need to be profitable in the UK, and with that comes risk of potentially watering down a very high quality business in Australia.

There's often an argument that growth is good. I think you've got the impression that I'm a guy that loves to see growing businesses, but you can be guilty of over-complicating it.

If I look at one of a number of our holdings in the portfolio, if you look at REA, it has got one of the most extraordinary Australian businesses that I think you would almost find anywhere in the world in terms of a digital marketplace.

They have made a number of attempts at going into, in inverted commas, less mature, lower internet penetration, where things were being done the way they were 15, 20 years ago in Australia.

Over the time, you wouldn't say it's been a great move for them. They would've been better off just sticking to what they're doing in Australia and just letting that business continue to power ahead.

Realtor is an interesting business in the US, which they own a chunk of, particularly with what's going on with Zillow at the moment, who are closing down their house-purchasing arm, which is pretty interesting.

We did meet with them in the US a couple of years ago. I think there is a prospect that that business could do really well over there, but it's going to take a very long time for Americans to change the way that they purchase properties.

PEXA could be a great business as it is. The board ultimately would need to make the decision as to whether they go holus-bolus at the UK, and then you make a decision as to whether you think that's too risky a move or not.

In terms of Link, what I would say — and I've had these thoughts rattling around in my mind — is you would have been so much better to invest in REA than you were in News Corp.

There's been countless other examples where if you really like a business within a business and you can access that business, despite the remaining business looking cheap (and News Corp has been a constant theme in that respect), go for the business that you really like.

You're probably going to do a lot better. It's probably a lesson that we could have got onto a bit earlier, but I am hoping that ... I think, this transaction that's been announced late last week makes sense.

I think shareholders in Link are going to be passed through PEXA shares, which we would love, and then take up cash at what looks like a pretty reasonable premium to me for the part of the business that's really been struggling.

Poke

I didn't want to ask you a generic, boring question like, what's the next Afterpay? I think we've probably all heard that question too many times.

Clark

I don't have the answer.

Poke

Neither do I. I'd probably be sitting on that one myself. I was thinking about what the question is really getting at, which is what's going to be a stock that everybody is going to be talking about and that is going to produce high returns?

Obviously, a reasonable question to ask. I don't think it's a controversial statement to say that that would be pretty closely related with companies that grow at a very high rate.

So given that, when you're looking out over the next five years at your portfolio, what's the company that you see that you expect to produce the highest levels of growth?

Clark

I'd come back again to just when you say highest levels of growth. I think if I was singling out two businesses in the smaller end that I think will have the strongest levels of profit growth over the next five years but the market is pricing a lot of that in today, they would be Audinate. I think it's a business that is really transforming the industry that it's operating in.

Betmakers would be another business, which is hopefully going to really benefit from the opening of the US sports-betting market, which is, I think, going to be an enormous investing event over the next two decades.

However, I would at the same time say that the market is ascribing very healthy valuations for future levels of growth. Hopefully both of those businesses over time grow into those valuations and can continue to deliver good returns for shareholders.

I think if I was looking at one in the portfolio, which I would have the highest conviction in, it would be ResMed, which I know is a much more mature business than those other two.

I just continue to look at where they're headed. There's 1.6 billion people globally who still have undiagnosed sleep apnea or chronic obstruction pulmonary disease or COPD, it's called. 1.6 billion.

We know now that the clinical trials and all of the data that is looking at with people who suffer from these conditions categorically shows that it causes some pretty nasty things for your body over time.

It will dramatically shorten your life. It will put more pressure on your heart. It will probably mean that you're more likely to be obese, et cetera, et cetera, and all the knock-on effects of that.

So doctors are becoming a lot more proactive at diagnosing these conditions, which I think had a bit more of a stigma 10 years ago, and treating them. ResMed is the largest player in this market.

It had what I think is a game-changing experience in the last year where their second largest player, a company called Respironics, which is owned by Philips, has had a global product recall of their main device, which has just opened up this runway for ResMed.

When we're talking about market behaviour, I think markets can overreact in the short term to bad news, and they can under react to good news. It takes time for the market to see on the upside where that's coming through.

At the same time, as Respironics is having to pull their device, ResMed is launching their new AirSense 11. The lifespan of these devices is much longer than, say, an iPhone. You don't get every year a new device. It's every five or six years. The new device looks completely different to the old device.

It's always a period where you will see an acceleration of sales because the existing users of your devices will look at it and go, "Definitely, I'll get the new one." The doctors recommend it to them.

The technology around it is way superior, but what's happening now is you've also got all of these Philips patients who are being forced across.

ResMed have been very smart in building out a digital ecosystem around the devices and masks that they sell, where once you become a ResMed customer, it will become very hard for you to, say, go back to Respironics when they do come back to the market.

So when we're talking about the quality of revenue or the quality of earnings, to me, this is a great example of it, where once you've become a ResMed patient, it's highly unlikely that you will leave and you will probably keep paying this recurring fee of income not just for the devices, but also to monitor your sleep.

Doctors can now access the data through the cloud so that they can actually monitor their patients, and if there's a problem they can pull them in. It takes strain off the healthcare system, particularly in the United States.

It's just got a lot of the other things we look for. Mick Farrell, who's the CEO, has been there for 20 years and has delivered in spades for his shareholders and his patients and his stakeholders, as he would say.

The balance sheet is pristine. We think the earnings per share should at least double over the next five years.

It's trading on an EV/EBITDA I think at around eight to eight and a half times at the moment, which isn't overly stretched.

If you're looking at a PE, it's probably in the mid 30s to high 30s, reflecting the very strong balance sheet that ResMed has.

If I was singling out one in the portfolio which I think not only could grow strongly over the next five years but I think grow reliably — that's something that really appeals to me, is going to bed and not losing a night's sleep.

That's a nice feeling, and having businesses like that along with other businesses where it's going to be a more volatile journey, but you hope they can work their way to becoming future ResMeds.

Poke

If you're happy to hang around for a little bit longer, I have three favourite questions that I always like to ask each one of my guests.

The first one is about books. What's a book that has been particularly influential on your investment philosophy? What did you like about it?

Clark

I know One Up on Wall Street by Peter Lynch gets a lot of mentions. This next one probably does as well. You've got to read One Up on Wall Street, but Lynch's book Beating the Street was probably one that really ... I think when I started back at a stockbroking firm called D&D Tolhurst, I was 21, fresh out of uni.

Jeremy Hook, who I still sit next to now and work with, he said, "Mate, go away and read this, and try and ignore the 20 cent mining IPOs that we are currently in the process of doing and learn how to invest well."

Jez puts a wise head on my shoulders very frequently, but it was definitely one of the better things that he helped me out with. It's a great story. It's easy to read. It's got so many good lessons in there that really strike a chord with me.

In terms of what I like, really there was a strong process-driven argument about how to invest. I try and do that myself. Be inquisitive. I think that's one of the main premises of the book is talk to people, go and look around, open your eyes. There's a great quote in there: "If you love the store, you'll probably love the stock."

If I look at two of the best ideas that we've come across in the last decade, one was Dulux, just because every time a painter came over and did work, you'd have a chat to him and ask: "Why are you recommending Dulux?"

They'd say, "It's the only paint company that will give us a five-year guarantee in this country. No one else does it. So if you want a five-year guarantee from us, it's got to be Dulux." That got me onto it.

Reece. When every plumber you speak to says, "Don't use anything else, use Reece, and look how quickly I can go. I know it's in stock and I don't have to sit out the front for two hours waiting for a part or something like that."

It makes their life easier, and the quality of the products. They know that they're not going to have to come back and fix them and that's going to make their job easier.

So be inquisitive and be patient. I'll never have another Afterpay. We've had some really good five to 10 baggers, but they've occurred over much longer time frames, but stick with the businesses.

A quote Lynch also states I'll never forget: "Don't pull out the flowers to water the wheat." Stick with your best businesses, and don't get itchy fingers and try and think, "Oh, that one looks cheap. We'll sell a bit of that and we'll go into that." It's rarely a good idea.

Poke

I think you're actually the first person who's mentioned Beating the Street on the show. As you rightly point out, we do get One Up on Wall Street as a fairly regular recurring recommendation. As I always say to people, if you haven't read it by now, you have to go read it. Same author.

Clark

Peter Lynch.

Poke

Yeah. Did he write it with somebody else or maybe it was the other one he wrote with somebody else?

Clark

No. I think he wrote it by himself. He wrote it at a funny time in his life, I think. I I haven't read it for a while now, but he was packing up the Fidelity Magellan fund.

Lynch basically decided that he never saw his kids. He'd never exercised; he lived and breathed the markets, and there was little else going on in his life. I think he was in his mid 40s or something, which probably a similar time to me, now that I think about it.

Maybe that's why I've mentioned it. I think it was looking back at the 39 years that he was managing that fund and the things that he employed that got the returns it had earned.

Poke

Could you tell us about your biggest gain or loss? What were the most valuable lessons that you took from the experience?

Clark

Afterpay would be the biggest gain, but we've spoken about that. I know CSL is a much more mature stock, but it would easily have to be one of the biggest gains. I'm probably going back now to managing private client money, which has been a much longer journey for us than the fund.

Certainly in the fund, it's been Afterpay, but we've owned CSL. It would easily be for 15 years now. I couldn't actually tell you what it was trading at back then. It's obviously done a share split. I think it did a three for one at some stage.

There has only been one time in my career that I've had to worry about CSL and, of course, that was when September 11 happened.

As with COVID, the bizarre knock-on effects you can get from these left-of-field events, where Americans went out, donated blood in droves because of the tragic loss of life and people in hospital, and it completely distorted the blood market for several years.

Who would've predicted it? Even if you knew what was going to happen, I don't think you would've got to that next point, just as we've seen with lockdowns and things like that in COVID.

Aside from that, I just think that the market is growing. They continue to grow into the market. They invest very aggressively back into their business at incredibly high rates of return on invested capital. I am sure it is going to be a fantastic performer for the next decade.

Poke

I'm assuming you were talking about 2006 there, just because you said you weren't sure of the price. It looks like it was trading somewhere between around $15 and $20 in that year. I reckon that's not bad — what is it, $315 or so today?

Clark

Yeah. I actually had a client who came to us who inherited some shares from her mother. When I looked at her, I was like, "There's got to be a mistake with this cost base."

It was $5,000 had gone into CSL, I think around the float or shortly after, and it was worth well over $1 million. It was just incredible. The wealth creation that the company has provided has been amazing.

Poke

I have one last question for you, but as I'm sure you're aware, I always like to insert a disclaimer. Don't try this at home.

I'm not actually suggesting to anybody that they go out there and put all of their money in a single share and forget about it for five years. This is supposed to be an exercise in long-term thinking and hopefully a little bit of fun.

That said, if markets were going to close for the next five years, starting from tomorrow, and you could only own shares in one company, what would it be?

Clark

There's been a couple: ResMed, CSL — great businesses. Just to do something a bit more interesting, and I still would probably say this would be my one company.

It would be REA, which I know I discussed very briefly earlier, but not all businesses are created equal, and this company effectively has a stranglehold over the property advertising market in this country.

There is a number two player, Domain, but around 7 million people exclusively are looking at REA a month. I think it's now over three times the visits versus the closest competitor.

The financial attributes of this company are rare. The return on equity, the EBITDA margins, which are frequently in the high 50 percents — you just don't see businesses like this very often.

REA is another one of those companies, which for as long as I followed it — and I think we've been in there since about $15 or $16 — it has always been seen as expensive. There have been very few buy recommendations along that journey. It's always been recognised as quality, but too expensive.

It comes back to what I was talking about earlier, taking a long-term view because if you take a long-term view, you can buy more expensive quality businesses and you will be rewarded over time.

But I think also, if I was picking this out over the next five years, I'd say the catalysts I can see are that we've had an abnormally low period of property settlements and properties going on the market or listings, and that's been because of COVID.

My personal view is the housing market is hitting a tipping point. We're either close to a peak or maybe we're at it at the moment.

As we come down the other side, what you will see is volumes go up, and that'll be because people will start to feel like they've missed it: "Let's get the house on the market while things are still pretty good."

It will also be a time when people can sell their place and be a bit more confident that they can step aside and wait for something to buy, which REA frequently talks about.

They say, "A red-hot housing market is not good for us because people sit on their hands. They're worried that they won't be able to find something else to buy and prices will keep going up."

So I think the listing volume side of it is going to be really advantageous for them over the next years. The market as a whole will continue to grow because we have an increasing amount of housing stock in this country.

I think the market share over Domain will continue to grow. The value creation that they're providing for the agents and for the vendors will continue to be reflected in higher and higher prices that they'll charge.

So that's a pretty awesome combination when you've got those things coming along. Yet they've got an interest in an Indian platform, which does look quite good and there's Realtor in the US. So one of those could be meaningful over the next five years.

The last thing I'll call out is the NSW Government has this interesting idea of changing stamp duty and how it's charged on properties, which potentially could make properties transact much more frequently. That would be like gold for the REA business. It's going to take some time, but it's on the horizon.

Poke

Ben, thanks for chatting to us today. It was really fun to hear your thoughts and it's great to finally chat with you.

Clark

Thanks for having me, Patrick. I really enjoyed it.


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