Glennon invests in Australian small and micro cap companies, most of which have earnings, prospects of growth and a valuation that makes them attractive. We stick mainly to industrials but will invest in resource stocks but prefer them to have earnings or a clear path to earnings.
For a small portion of the fund we believe there is room for investments of a more speculative nature. As with any equity investing not everything works out, and perhaps the failure rate is higher amongst companies lacking earnings in the short term, but the opportunity to add return through the incubation of strong concepts is something to encourage. Pretty sure Google, Amazon, Apple and Microsoft didn’t make money when they started out.
We’re not talking throwing darts against a wall and hoping to snag a couple of winners … because that option is there based on the enormous number of micro cap opportunities that come through our doors each week. Some of these are directly into listed equities, some via pre-IPO deals.
A qualifying investment must have legitimate intellectual property, a strong thematic, an exciting macro opportunity, the ability to scale, experienced management, enough resources to make meaningful advances and a clean shareholder structure. It helps if there is already some revenue and market position but it is not an absolute requirement.
Glennon has had some great success incubating such companies.
Titomic was a 10-basis-point position in the fund initially, hardly worth talking about. But the titanium 3D printing business had CSIRO IP behind it and an almost monopolistic high-end titanium market to disrupt. As we got more familiar with the story we were happy to contribute a further equity investment. It’s clearly a news driven stock because it is still investing in its technology and capacity. It has launched its giant 3D printer in Melbourne and has announced R&D agreements with a number of international players in sectors as varied as shipping, golf and cycling. The stock has put on 1600% since we first invested and, despite still being highly speculative, it is a kind of free-carry for the portfolio. Of course, we are mindful of emerging competition and any other risks to the investment, including the hyped-valuation. We certainly don’t want to leave it all on the table.
Our recent foray in Bounty Mining, the Bowen Basin coking coal producer, started with a pre-IPO investment at 30c and was extended at 35c at the IPO, armed with more information and comfort with the management team. It’s early days but the share price has responded well upon listing and the company has produced and shipped its first coal. There is plenty of expansion underway and the end game is many years off. Even though this coal asset has been mined by several parties over the years the current management has seized an opportunity at the right time. The previous owner spent $1bn on the asset so the infrastructure is in great shape. They also used incorrect mining technique for the geology which sets up the opportunity. And the coking coal price has appreciated strongly - so with global supply limited and demand from Asia strengthening the macro outlook is good.
Taking some liberties with our definition of a speculative investment we also cite Afterpay Touch as an example of the genre. It does have domestic revenues and earnings but it is now being priced for success in the US market which it has only just entered. Thus, there are just early revenues and losses due to the investment required to start the business up. It is speculative but given the jump start it is being given by existing retail partners we can see it succeeding. Today’s PER looks pretty extreme but the PER three years out could quite easily look normal. There’s no way today’s market can factor in all of the potential success in a market the size of the US.
So, speculative stocks come in many shapes and sizes but are definitely worth considering. We are not betting the house on these stories but feel the need to introduce some excitement into the portfolio now and then, at the same time always mindful to limit our losses if they indeed occur.