Will Mumford’s go to metric for finding high-quality stocks

What’s the first thing you look at to figure out if a company is high-quality? Return-on-equity, margins or perhaps its a qualitative factor like customer retention.

Will Mumford, Deputy Portfolio Manager at Auscap Asset Management, says he looks for long-term earnings growth as the best litmus test for identifying quality.

“I'd call out the 10-year compound earnings per share growth of a company. I think it's just a good shorthand way of thinking about whether a company actually can grow earnings and has a structural competitive advantage.”

Mumford says when he started his career he had a bias towards finding companies trading on low price to earnings multiples, but that approach has evolved during his seven years at Auscap. Today he is more focused on finding companies with enduring quality at a reasonable valuation.

In this Rapid Fire interview, Mumford discusses one sector rich with opportunities, a stock with a standout management team and a lesson he has learned about managing a portfolio since joining Auscap.

Transcript

Are you bullish, bearish or neutral on the opportunity set you see across the ASX right now?

Will Mumford: I’d say neutral overall. The market’s P/E multiple is historically high - that’s clear. But within the market there’s a lot of variability. Some sectors are cheap, and interestingly, those aren’t necessarily the lower-quality areas. That creates opportunities.

Which sector do you think is rich with opportunities as we look over the next 12 months?

Will Mumford: We tend to focus more at the stock level, but one sector standing out at the moment is healthcare. A number of companies are trading below their historical valuations. They’re leaders in their fields, with strong track records of earnings growth. We think it looks pretty attractive.

Can you share a company in that sector to bring it to life?

Will Mumford: Resmed (ASX: RMD)  would be my pick. It’s a dominant player in its market, serving a large, underdiagnosed customer base. The company has a long history of double-digit earnings growth, it’s founder-led, and there’s upside potential from both wearables and GLP-1s.

What’s the metric / fundamental indicator that matters most to you when looking at a prospective investment?

Will Mumford: There are many, but I’d highlight 10-year compound earnings per share growth. It’s a great shorthand for whether a company can genuinely grow earnings and whether it has a structural competitive advantage. 

It also acts as a nonsense detector - if a so-called quality business hasn’t grown earnings in 10 years, you need a compelling reason to believe that’s going to change.

Which management team stands out as executing exceptionally well right now?

Will Mumford: I’d call out Eagers Automotive (ASX: APE). Every time we meet with them, they’ve got a new initiative that could be a game changer. Not everything works — for example, the plan to consolidate dealerships at Brisbane Airport fell through. But their joint venture with BYD is a standout. A few years ago, hardly anyone had heard of BYD. This year, it’s expected to generate $2 billion of revenue for Eagers.

You’ve been at Auscap 7 years now - what’s a practical lesson about portfolio management that you’ve learnt during that time?

Will Mumford: The importance of quality. When I first came into markets, I was drawn to low P/Es and mean reversion. But as Buffett says, a great business at a reasonable price often offers more margin of safety than an average business at a low multiple. You want your portfolio stacked with Roger Federers and Cristiano Ronaldos - not long shots.