What do catalysts mean for the investment choices in The Montgomery Fund?
In this video I ask Sean Sequeira to explain how the team at Australian Eagle Asset Management identify catalysts or change to refine the investment universe and pick the most successful opportunities. Change within a company will drive quality improvements and earnings growth to close the gap between price and value. One example of this can be seen when Altium expanded their market size with the acquisition of Octopart.
Transcript
Roger Montgomery: I’m Roger Montgomery from Montgomery Investment Management, and I’m with Sean Sequeira to talk about change. What do catalysts mean for the investment choices that Sean, Alan, and his team make for The Montgomery Fund?
In the previous video, we talked about the need to identify high-quality, we talked about valuation, but then perhaps distinctively, you mentioned change. I call them catalysts. You’re looking for something that is going to mean the gap between price and value closes, and that helps reduce the risk, or perhaps the time it takes for investors to generate a return. Talk a little bit about what you’re looking for when it comes to change or catalysts.
Sean Sequeira: What we’re looking for when we talk about change or when we talk about catalysts and triggers, those things that drive change within a company, will drive quality improvements or earnings growth profile improvements. That may be things within a company’s control, such as purchasing a new company that expands their market, entering a new market in terms of product, changes in management, changes in balance sheet structure, or the structure of the company in total. What we want to find is a company where the change may improve the quality or the earnings growth profile.
Roger Montgomery: So, when you do identify that change, presumably the rest of the market doesn’t value it the way you do or doesn’t see what you are seeing. Can you provide an example of a change that you identified and were successfully invested in?
Sean Sequeira: An easy example to explain is Altium (ASX:ALU). Altium was a good quality company. They had a very good market share within their available market size, something like 35 per cent. And usually, when they’re at about that level, there’s not that much further upside you can gain within a competitive market. What we saw was a good quality company that bought a new company that vastly expanded their available market size.
Roger Montgomery: It was Octopart, wasn’t it?
Sean Sequeira: It was Octopart. They bought Octopart and made a number of other smaller acquisitions. Their available market size went from 500-600 million to 9 billion. That allowed their earnings growth profile to change. It accelerated their revenue growth. The market took a little while to pick up on the implications of these purchases. We were able to identify this, utilise the fact that they had been a very good quality company over a very long period of time, and extrapolate that into the future to say that this company could actually grow a little bit better than what they had done in the past. And indeed, they actually doubled their earnings growth profile.
Roger Montgomery: The market was very focused on 10 per cent earnings growth, but it was significantly more than that.
Sean Sequeira: It ended up being 20 per cent for a number of years. And indeed, if you look at the company now, they’re still forecasting 20 per cent for the next three to five years to hit their $500 million revenue targets.
Roger Montgomery: Thanks very much, Sean. Well, there you have it, how Sean, Alan, and his team identify catalysts or change to refine the investment universe and pick the most successful opportunities.
The Montgomery Funds own shares in Altium. This video was prepared 11 October 2022 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Altium you should seek financial advice.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
