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How AfterPay and Pro Medicus show why you must buy founder-led companies

Australian $50 dollar notes

This week I wrote an article about 5 founder-led companies for investors to buy that featured companies including ResMed Inc. (ASX: RMD), ARB Corporation (ASX: ARB), Magellan Financial (ASX: MFG) Dicker Data Ltd (ASX: DDR) and NASDAQ-listed Twilio.

Over the long term all these companies have thumped the returns of the market partly because the founders have significant stakes in the business and consequently run the businesses on behalf of their shareholders.

This might sound obvious, but you’d be amazed how many companies listed on share markets aren’t really run with shareholder interests as a priority. In fact many management teams at listed businesses simply see the share market as a way to raise and spend a lot of capital for purposes including their own remuneration.

To be fair share markets exist to enable companies to raise capital and to allow public ownership them in via the trading of shares it’s just that smart investors should avoid the many companies good at spending cash, but not making it.

Founder-led companies then tend to have a far better focus on costs and profitability as the owner will not want to see his company’s cash wasted on frivolous expenses.

A founder is also unlikely to give out unrealistic profit guidance in an attempt to artificially inflate the share price ahead of a capital raising or in order to sell his own shares at inflated prices. After all a founder will be focused on the long term and would not want to see the value of his holding plunge 30%-40% in a day.

So if we take the golden rule that good, trustworthy and aligned management is one of the keys to investing in the share market successfully, we can take a look at five more founder-led companies to consider buying.

MNF Group Ltd (ASX: MNF) is the voice-over-internet business led by founder Rene Sugo that has a strong track record of profit and dividend growth. I’m a little concerned about its Pennytel business’s investment in mobile and would rate the stock a hold for now at $4.42.

Pro Medicus Limited (ASX: PME) is up 15x from 85 cents per share to $12.8o today over the past five years and is a founder-led software-as-a-service business in the healthcare space that still has a bright future. Its valuation may have gotten ahead of itself for now and I’d wait until the interim profit report in February before considering buying into the stock.

ELMO Software Ltd (ASX: ELO) is another software-as-service business in the HR space. It’s growing nicely and is run by its founder Danny Lessem, although it doesn’t have much of a track record as a listed company, so I’d rate it a hold for now given the valuation.

AfterPay Touch Group Ltd (ASX: APT) is alongside Pro Medicus one of the strongest performers on the market over the last few years. It’s up from $2.95 in June 2017 to $15.60 today and no surprise its led by two founders in Nick Molnar and Anthony Eisen.

Amazon Inc is included to ram home the point that the greatest growth stocks will always be founder led! It’s up from US$2 per share in 1997 to US$1,654 today under the guidance of its entrepreneurial founder Jeff Bezos.

Foolish takeaway

In my opinion serious retail investors should have at least half or far more of their portfolios invested in profitable founder-led companies as this will give you the best chance of owning the best growth stocks to create serious wealth.

It will also help you avoid a lot of the big losers that often come about as a result of unaligned and untrustworthy management teams.

Where to invest $1,000 right now

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.

*Returns as of June 30th

Tom Richardson owns shares of ResMed, Magellan, Dicker Data, Twilio Amazon, AFTERPAY T FPO, ELMOSFTWRE FPO, MNF Group Limited, and Pro Medicus Ltd. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Amazon and ELMOSFTWRE FPO. The Motley Fool Australia's parent company Motley Fool Holdings Inc. recommends Pro Medicus Ltd, ResMed, Dicker Data and Twilio. The Motley Fool Australia owns shares of and has recommended MNF Group Limited and Pro Medicus Ltd. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended ELMOSFTWRE FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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