If you follow the business media you’ll always see professional fund managers talk publicly about how ‘excellent’ management is a key requirement they look for when buying companies.
Of course it’s one thing to say we only buy companies with great management, but another thing to practice it, and one area many investors probably hurt their returns is in paying insufficient attention to management’s motives or qualities even if they publicly proclaim they do.
In fairness though assessing management is a tough task and even tougher for retail investors who have little to no special access.
It’s also tough as just because a management team or CEO is ‘smart’ doesn’t mean they’ll act in the interests of shareholders. In fact the smarter they are the better they might be at painting a better impression of a business than the actual reality.
As such buying shares in most companies generally involves a leap of faith in management teams that it’s impossible to have a perfect read on.
One option to negate this problem is to only buy or nearly only buy companies still run by their founders.
This is common sense as a founder knows a business better than anyone and is only likely to have its long-term interests at heart. A founder is also likely to still have a huge shareholding and more disciplined focus on cost controls for example.
In fact there’s a lot of evidence that shows founder led businesses tend to heavily outperform other businesses in the share market. So let’s take a look at five I’d be interested in buying in FY 2020.
Magellan Financial Group Ltd (ASX: MFG) is the international equities manager led by founder Hamish Douglass. It has a strong track record of funds under management growth and costs are relatively fixed, which has allowed it to grow profits at strong rates.
Pro Medicus Limited (ASX: PME) shares are looking a expensive for now, but this online-based software-as-a-service medical imaging business still retains a potentially bright long-term outlook. Its founder remains in charge and patient investors might get a cheaper share price later in the year.
WiseTech Global Ltd (ASX: WTC) is another software-as-a-service business in the global logistics space that is pursuing an aggressive acquisition strategy as part of an effort to become a dominant market leader in its space. The founder says it’s all part of the long term plan and may be proven right. Again though shares look a little expensive for now.
Okta Inc. (OKTA) is a US$12 billion software-as-a-service and cloud-based cyber security business listed on the NASDAQ that is growing its top line and large subscribers (>US$100k pa) strongly. Its founder led and sells mainly into the private sector, but has potential to expand into the public sector in the future.
ResMed Inc. (ASX: RMD) is led by its founder’s son and has a superb long-term track record of growth, with a large market opportunity ahead of it. The company has also taken on a couple of big acquisitions recently as it looks to leverage the trend towards online healthcare.
Of the above businesses, Magellan probably offers the best value for now in my opinion, with all likely to fall in value if global trade tensions continue to climb.
5 stocks under $5
We hear it over and over from investors, "I wish I had bought Altium or Afterpay when they were first recommended by The Motley Fool. I'd be sitting on a gold mine!" And it's true.
And while Altium and Afterpay have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $5 a share!
*Extreme Opportunities returns as of June 5th 2020
Tom Richardson owns shares of Okta, Magellan Financial Group, Pro Medicus Ltd., ResMed Inc., and WiseTech Global.
You can find Tom on Twitter @tommyr345
The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Okta and Pro Medicus Ltd. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of WiseTech Global. The Motley Fool Australia has recommended Pro Medicus Ltd. and ResMed Inc. 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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