"My investment process is geared towards finding unloved companies with downside protection that have unrecognised growth options."
My investment process is geared towards finding unloved companies with downside protection that have unrecognised growth options.
Most people would think about Mulberry as a pure growth stock, but when I bought it back in 2009, it was very much a value stock. It traded then on only 0.4 times enterprise value to sales. This is a key ratio for me when looking at retailers and an extremely low value such as this usually means that the market ascribes little present value to the any future cashflow the company may be able to produce. If you can take a contrarian view at these valuations and identify a reason that the company will perform better than the market expects, you can end up with a very profitable investment.
I compared it to another British luxury goods producer, Burberry, which had much higher sales (£1.25bn versus £60m at Mulberry), and a higher margin. Mulberry was at an earlier stage, and engaged in costly projects such as the building of their flagship store in London. However, I thought the work they were doing would pay off in the long term, and that the market would reward them with a rating that was more in line with its luxury peers. One thing I like to see is companies with good brands but low margins – if management can describe to me convincingly how they plan to increase margins, and this argument is backed up by the work of our analysts, it is often a good sign. In the case of Mulberry both sales and the margin grew quickly and significantly, so the company benefitted from both earnings per share growth and a re-rating of its valuation multiple.
I held the shares for around 18 months, which is a typical length of time for me, buying June 2009 at 61p and selling in early 2011 at £13.53. By this time the company was trading at a premium its peers, but there was a lot of demand for the shares from growth investors, so I was able to realise a large profit for my investors.