This article first appeared in Livewire on 19 July 2024
In part two of this series, three veteran stockpickers seek out the next great market champion.
Among the many words of advice we have from the Oracle of Omaha is one that reminds investors of what they are actually buying when they are buying stocks.
"If you own your stocks as an investment—just like you’d own an apartment, house or a farm—look at them as a business," said Berkshire Hathaway Chairman and CEO Warren Buffett back in October 2014. He went on to add: "Find a good bunch of businesses and hold them."
Holding onto good businesses can make you very wealthy during a cycle. But holding onto the best businesses can help you weather more than a few cycles - decades, even. These 'best' businesses are what Bridgewater Associates call the "market champions". We talked about this in-depth earlier this week with the help of Datt Capital's Emanuel Datt, Justin Teo of Fidelity International, and Luke Laretive of Seneca Financial Solutions.
This wire is part two of my discussions with Datt, Teo, and Laretive. In this wire, we'll discuss what they think are the traits required for a company to go from "market average" to "market champion". Then, we'll ask them to gaze into their crystal balls and ask them to name a stock that could become a future market champion.
What makes for a market champion?
We asked each of our guests to share with us the traits that they think make for a market champion. Here's a collection of what they said:
Create an indispensable product that consumers will gravitate to: "Focus on product development in a highly customer-centric manner. The best businesses provide indispensable services and utility to their customers," Datt noted.
Similarly - create a unique selling point: "For most companies, this means selling a differentiated product or service to either grow the overall addressable market or take market share from incumbents," Teo said.
The example that Teo provides of a market champion is Wisetech Global (ASX: WTC).
"Its core product, CargoWise, adds significant value to customers as it allows for simplification of complicated freight logistics systems, while also saving money through companies being able to switch off legacy IT systems with less functionality," he said.
"Software businesses tend to be incredibly scalable because once a piece of software is developed, there’s minimal incremental development cost associated with selling another licence. Once Wisetech’s software is integrated into a customer’s core systems, there’s a significant incumbency benefit, as a customer is unlikely to change software provider unless something goes wrong. This incumbency is a significant competitive moat for Wisetech," he added.
Management teams matter: "Strong leadership with ambitious, growth-orientated goals who can instil a high-performance culture," said Datt.
Dominance in a growing but niche market: For instance, as Laretive explains, REA Group was a first-mover in the online real estate listing market.
Develop and build strategically important assets: "Consistent innovation and improvement are key to this, as well as disciplined decision-making around capital allocation and execution," Datt added.
Finally, don't get bought out: "You need to be in an industry that is large enough to get you a $25 billion market cap, but small enough that you don’t get a takeover bid from a competitor overseas or vertical integrator. Many of our best companies, with the most potential get taken over as bolt-on acquisitions, geographic expansions, and/or synergistic aggregations," Laretive said.
Emanuel's Champion: Clarity Pharmaceuticals (ASX: CU6)
Emanuel Datt, Datt Capital
Investors might be wise to listen to Datt. His winning stock-picking track record is frighteningly diverse - Afterpay, Whitehaven Coal, and WA1 Resources are all on his list of achievements in the last few years alone. Now, Datt has his eyes set on the healthcare sector.
"Clarity Pharmaceuticals (ASX: CU6) ticks a lot of boxes for us in terms of defining a potential future champion. The team are ambitious, aligned and growth-orientated. The product pipeline is relatively deep and they hold intellectual property that is highly innovative. The business has matured over a number of years to focus on attempting to treat health conditions of real need (eg. prostate cancer) and with a large global addressable market.
This company still bears significant risk given they are still performing clinical trials and will be subject to the standard commercialisation risks usual in pharmaceutical development."
CU6 over the last 12 months alone. (Source: Market Index)
Justin's Champion: Neuren Pharmaceuticals (ASX: NEU)
Justin Teo, Fidelity International
Teo nominates Neuren Pharmaceuticals as one company that may have what it takes to go the distance. Not only does it possess the traits of a market champion, he sees similarities in this stock compared to another biotech that Fidelity has backed (to much great success) - Telix Pharmaceuticals.
"Neuren Pharmaceuticals (Neuren) is a biotech that develops treatments for rare neurological disorders. The company’s first commercial product, DAYBUE, is the only treatment approved by the US Food and Drug Administration for patients with Rett syndrome, a disorder that causes the progressive loss of motor and language skills."
"Neuren and its distribution partner Acadia Pharmaceuticals (Acadia) launched DAYBUE in 2023 and Acadia has already achieved over US$250 million of sales in the US, with Neuren
earning royalties on these sales. DAYBUE sales are likely to extend into markets outside the
US once regulatory approvals are achieved."
"Neuren’s next asset, NNZ-2591, is in Phase 2 development and is targeting four different syndromes - Phelan-McDermid, Angelman, Pitt Hopkins and Prader-Willi. The combined addressable market of these syndromes is more than 3x larger than Rett, so if Neuren successfully commercialises them, this should drive a significant valuation increase and help Neuren become a market champion," he said.
NEU over the last 12 months alone. (Source: Market Index)
Luke's Champion: GQG Partners (ASX: GQG)
Luke Laretive, Seneca Financial Solutions
Not to be outdone, Laretive has a string of winners of his own. He was an early backer of everything from Syrah Resources to Zip Co and Vulcan Energy Resources. But his latest pick for a future market champion is in the funds management space - ASX-listed GQG Partners (a company that Laretive has owned since the stock was $1.40).
"We think GQG Partners (ASX: GQG), at $8.5 billion market cap, has the scope to double over the next 5-10 years. It wouldn’t quite make the top 20, but we certainly can see it being included in the major indices once the free float is increased."
GQG Partners over the last 12 months (Source: Market Index)
He also thinks that there is another major financials firm lurking on the ASX - but for this other idea to work, two of the biggest players in the space would have to merge.
"A merged HUB24 (ASX: HUB) and Netwealth (ASX: NWL) makes a lot of sense to me. If they did this deal, I could see this cracking the ASX 20 in due course. It’d be an effective monopoly on any financial adviser who doesn’t want to be aligned with a dealer group. It’d given them strong pricing power and I think the earnings synergies would create a lot of cash flow to reinvest in tech and functionality," he said.
HUB24 and Netwealth, over the last 12 months (Source: Market Index, TradingView)
