50/50! It’s up the the company to increase those barriers via products or services. Or they could start offering something others don’t, creating a new barrier.
There’s heap of opportunities for any company in any sector or industry. 😄
You're playing it safer by spreading risk over multiple small-caps by investing in a fund. But yes, it's an option worth considering if you're into small-caps.
Hi FiC. I came across this post randomly. Or rather the Substack Algo thought I should see it. For context, I run a global quality equity fund for a family office. In amongst the usual suspects (MSFT, TSM, SPGI etc) and because the family in question is UK-based, there is a 25% allocation to UK equities, in which pool, I think you probably already know, quality companies are fewer and further between, necessitating research into much smaller market caps. I just thought you would like to know that the fund owns all of Craneware, Netcall and Alpha Group International and I rate all three highly, the latter so much that it is a top 5 position in a 200 stock fund- as big as Microsoft, Alphabet and Amazon! Private equity is also very keen and is sniffing around two out of the three as I write this. So here’s a hat tip to you and best wishes for your investment journey.
These are all great companies, but that doesn't necessarily make them good investments.
Before I get into that, did you know that Alpha Group is currently the subject of a buy-out? Corpay Inc has publicly acknowledged ongoing discussions regarding a potential acquisition of Alpha Group. The stock has rallied about 40% since the news broke and it may not be publicly listed for much longer if it is acquired.
Craneware is an interesting one - I didn't know the name before you mentioned it here. Until Covid it was earning excellent returns on Assets, Capital and Equity. However, since then, its returns have collapsed. What happened? It seems to be an efficiency issue as asset turnover has halved. Does it have anything to do with an acquisition they appear to have made in 2022? Perhaps they over paid for that because the amortization of goodwill/intangibles is significant. If you are able to share any colour, I would be grateful.
Vitec software was a name that I was familiar with. It is a mini-Constellation Software. There was an interesting Substack post from @PolymathInvestor this week which highlighted developments in AI software that enables non-technical people to create software using normal human languages. He raised an interesting question - 'does this erode the power of companies in the vertical software space?' The beauty of the VS model is that it didn't require much R&D. If a dentist had software that worked, it didn't matter that it was built on an operating system that went out of date 20 years ago. But now, what stops the dentist building his own state of the art software? Or, if not the dentist, his tech savvy son who no longer needs an army of developers when AI does that for him. Is this the disruptive technology that displaces the vertical software model? This was the post if you are interested: https://www.polymathinvestor.com/p/when-everyone-codes-at-warp-speed
ATOSS looks like an impressive business, but is it priced to perfection? Capitalized at 45x earnings and 11.5x revenue - there's no margin of safety there and any multiple contraction will significantly erode any future shareholder returns.
Hello James. I’m guessing your reply may have been aimed at the OP, not me. But here’s my tuppence worth. I referenced the potential bid for Alpha in the first of my posts. It’s a top 5 position in the 200 name fund that I run for a family office. So yes I’m very aware. The 40% rise that you quote is a little misleading. The whole index is up more than half that over the same period. Better to take a reference point before 2nd April and the excitement that followed and then you see the name is only up 15%. Frankly that looks pretty mean. My reading is that the potential bid is highly opportunistic - the stock was stupid cheap in mid-April - and that Corpay’s generosity will not stretch to levels that will move the company’s major shareholders. It is, in my view and that of others, the highest quality mid cap in the UK. It should not be allowed to go cheaply.
Craneware, also in my fund but a much smaller position - you’re correct that ROCE has fallen off a cliff. But that is not where the investment case rests. Rather it is all about a strong incumbent position as market leader in value cycle SaaS provision in the US with a 40% market penetration and the ambition to become ubiquitous in US hospitals. Craneware sits in the sweet spot of the structural transformation underway in the US healthcare market to value-based care which is currently also the hottest area of healthcare SaaS M&A activity. No surprise that it is also subject to a potential bid.
Will vertical software be upended by AI - I doubt it. In a previous life I built a sizeable, listed IT consultancy so I understand the range of skills required to build effective, resilient and future-proof software. And programming is only a small part of the task. My belief is that your dentist won’t want to take the risk of hiring her nephew when her business is on the line - all just to save $20 a month. That said, I am the person to give the lie to my own argument, having built the software that underpinned my business for 20 years in my own back room over a couple of weekends without any programming skills. But that was without the help of AI, which proves two things: firstly what you propose has been possible for decades, and secondly that (AI-threatened) programming isn’t the key requirement - it’s understanding and modelling the business and data flows.
ATOSS is one the fund does not hold and has never reviewed. At quick glance I concur with your assessment.
That goes for every company; they may be good, but not a good investment at the moment.
It was brought to my attention that there might be a possible buyout, yes. Nevertheless, I found it worth mentioning that it's a solid business, but perhaps not an investment due to the potential buyout.
Craneware has made some poor decisions and strategic moves, according to their management, as reported in a news release that I can no longer find. They mentioned that they've had missteps and have put a plan in place to restart their operations. This has to be seen yet, and I would stick to the sidelines to see their plan work out and generate good returns, while also cleaning up their ratios.
I'll look into the post and respond later. Would love to find out more before I make further comments.
ATOSS is priced for perfection, that's undeniable. I've been eyeing this company for a while, especially its CEO, who is worth reading about— a true visionary who executes on all levels. There needs to be some form of return to the mean for this business before it becomes a viable, interesting investment.
Ending this, thank you for your response! I gained some knowledge here and got a new article to read, which I appreciate.
Thanks for the thoughtful note—really appreciate you sharing that. Encouraging to hear we’re aligned on those UK names, especially Alpha. Makes the deep dives feel worth it!
You’re welcome. And thanks for highlighting Vitec software. Not a business I was familiar with but looks interesting at this price level. Investors need to hope that the recent drop on lower margins and eps is just a temporary bump in the road. The business reminds me of a mini Roper Technologies, that cash generative buy and build with a long track record of successful growth recycling cash flows into acquisitions, with which I imagine you’re already familiar. Valuation of Vitec is not optically cheap but it is quite attractive relative to its own history and that of Roper, which the fund holds. I’ve been reading the annual report this weekend and it looks like the sort of business that the fund likes to own: founder management with a large stake. high proportion of recurring revenues, good margins, tech-led. Thinking seriously about starting a position, but would only go with a third to a half while awaiting developments.
It's truly a sticky-type business, and the founder at the wheel gives it extra power. I've been digesting heaps of reports from them as well, and so far, there's limited disappointment with this company; I see true potential.
It’s important to respect the chart. The share has been range-bound for 4 years now and probably needs to exceed the projected 20% plus eps growth in the next 2 years to break through the resistance. But the SP is near the bottom end of its trading range while expectations for the current year are relatively modest. So that probably delivers some margin of safety in the short to medium term.
Aren’t most of these based in sub sectors where barriers to entry are particularly low?
50/50! It’s up the the company to increase those barriers via products or services. Or they could start offering something others don’t, creating a new barrier.
There’s heap of opportunities for any company in any sector or industry. 😄
thats sounds interesting
They’re all interesting in their unique ways :-)
Great post.
Thank you!
Really loved this post and some incredible recommendations which shows your hard work. Thank you
Prob just as well to invest in a small cap fund.
All these small caps tend to go up and down together.
You're playing it safer by spreading risk over multiple small-caps by investing in a fund. But yes, it's an option worth considering if you're into small-caps.
I know.
Hi FiC. I came across this post randomly. Or rather the Substack Algo thought I should see it. For context, I run a global quality equity fund for a family office. In amongst the usual suspects (MSFT, TSM, SPGI etc) and because the family in question is UK-based, there is a 25% allocation to UK equities, in which pool, I think you probably already know, quality companies are fewer and further between, necessitating research into much smaller market caps. I just thought you would like to know that the fund owns all of Craneware, Netcall and Alpha Group International and I rate all three highly, the latter so much that it is a top 5 position in a 200 stock fund- as big as Microsoft, Alphabet and Amazon! Private equity is also very keen and is sniffing around two out of the three as I write this. So here’s a hat tip to you and best wishes for your investment journey.
These are all great companies, but that doesn't necessarily make them good investments.
Before I get into that, did you know that Alpha Group is currently the subject of a buy-out? Corpay Inc has publicly acknowledged ongoing discussions regarding a potential acquisition of Alpha Group. The stock has rallied about 40% since the news broke and it may not be publicly listed for much longer if it is acquired.
Craneware is an interesting one - I didn't know the name before you mentioned it here. Until Covid it was earning excellent returns on Assets, Capital and Equity. However, since then, its returns have collapsed. What happened? It seems to be an efficiency issue as asset turnover has halved. Does it have anything to do with an acquisition they appear to have made in 2022? Perhaps they over paid for that because the amortization of goodwill/intangibles is significant. If you are able to share any colour, I would be grateful.
Vitec software was a name that I was familiar with. It is a mini-Constellation Software. There was an interesting Substack post from @PolymathInvestor this week which highlighted developments in AI software that enables non-technical people to create software using normal human languages. He raised an interesting question - 'does this erode the power of companies in the vertical software space?' The beauty of the VS model is that it didn't require much R&D. If a dentist had software that worked, it didn't matter that it was built on an operating system that went out of date 20 years ago. But now, what stops the dentist building his own state of the art software? Or, if not the dentist, his tech savvy son who no longer needs an army of developers when AI does that for him. Is this the disruptive technology that displaces the vertical software model? This was the post if you are interested: https://www.polymathinvestor.com/p/when-everyone-codes-at-warp-speed
ATOSS looks like an impressive business, but is it priced to perfection? Capitalized at 45x earnings and 11.5x revenue - there's no margin of safety there and any multiple contraction will significantly erode any future shareholder returns.
I welcome your comments.
Hello James. I’m guessing your reply may have been aimed at the OP, not me. But here’s my tuppence worth. I referenced the potential bid for Alpha in the first of my posts. It’s a top 5 position in the 200 name fund that I run for a family office. So yes I’m very aware. The 40% rise that you quote is a little misleading. The whole index is up more than half that over the same period. Better to take a reference point before 2nd April and the excitement that followed and then you see the name is only up 15%. Frankly that looks pretty mean. My reading is that the potential bid is highly opportunistic - the stock was stupid cheap in mid-April - and that Corpay’s generosity will not stretch to levels that will move the company’s major shareholders. It is, in my view and that of others, the highest quality mid cap in the UK. It should not be allowed to go cheaply.
Craneware, also in my fund but a much smaller position - you’re correct that ROCE has fallen off a cliff. But that is not where the investment case rests. Rather it is all about a strong incumbent position as market leader in value cycle SaaS provision in the US with a 40% market penetration and the ambition to become ubiquitous in US hospitals. Craneware sits in the sweet spot of the structural transformation underway in the US healthcare market to value-based care which is currently also the hottest area of healthcare SaaS M&A activity. No surprise that it is also subject to a potential bid.
Will vertical software be upended by AI - I doubt it. In a previous life I built a sizeable, listed IT consultancy so I understand the range of skills required to build effective, resilient and future-proof software. And programming is only a small part of the task. My belief is that your dentist won’t want to take the risk of hiring her nephew when her business is on the line - all just to save $20 a month. That said, I am the person to give the lie to my own argument, having built the software that underpinned my business for 20 years in my own back room over a couple of weekends without any programming skills. But that was without the help of AI, which proves two things: firstly what you propose has been possible for decades, and secondly that (AI-threatened) programming isn’t the key requirement - it’s understanding and modelling the business and data flows.
ATOSS is one the fund does not hold and has never reviewed. At quick glance I concur with your assessment.
Exactly, and its still under 12 times EV/FCF 😅
That goes for every company; they may be good, but not a good investment at the moment.
It was brought to my attention that there might be a possible buyout, yes. Nevertheless, I found it worth mentioning that it's a solid business, but perhaps not an investment due to the potential buyout.
Craneware has made some poor decisions and strategic moves, according to their management, as reported in a news release that I can no longer find. They mentioned that they've had missteps and have put a plan in place to restart their operations. This has to be seen yet, and I would stick to the sidelines to see their plan work out and generate good returns, while also cleaning up their ratios.
I'll look into the post and respond later. Would love to find out more before I make further comments.
ATOSS is priced for perfection, that's undeniable. I've been eyeing this company for a while, especially its CEO, who is worth reading about— a true visionary who executes on all levels. There needs to be some form of return to the mean for this business before it becomes a viable, interesting investment.
Ending this, thank you for your response! I gained some knowledge here and got a new article to read, which I appreciate.
Thanks for the thoughtful note—really appreciate you sharing that. Encouraging to hear we’re aligned on those UK names, especially Alpha. Makes the deep dives feel worth it!
You’re welcome. And thanks for highlighting Vitec software. Not a business I was familiar with but looks interesting at this price level. Investors need to hope that the recent drop on lower margins and eps is just a temporary bump in the road. The business reminds me of a mini Roper Technologies, that cash generative buy and build with a long track record of successful growth recycling cash flows into acquisitions, with which I imagine you’re already familiar. Valuation of Vitec is not optically cheap but it is quite attractive relative to its own history and that of Roper, which the fund holds. I’ve been reading the annual report this weekend and it looks like the sort of business that the fund likes to own: founder management with a large stake. high proportion of recurring revenues, good margins, tech-led. Thinking seriously about starting a position, but would only go with a third to a half while awaiting developments.
It's truly a sticky-type business, and the founder at the wheel gives it extra power. I've been digesting heaps of reports from them as well, and so far, there's limited disappointment with this company; I see true potential.
It’s important to respect the chart. The share has been range-bound for 4 years now and probably needs to exceed the projected 20% plus eps growth in the next 2 years to break through the resistance. But the SP is near the bottom end of its trading range while expectations for the current year are relatively modest. So that probably delivers some margin of safety in the short to medium term.