With the aim to generate alpha, long-term investors tend to employ a concentrated portfolio approach. But one challenge here is to efficiently filter out the ultra-rare quality businesses from the global total stock markets consisting of over 100,000 companies.
We at Urbem believe that with some tools, investors can get to their dream businesses more easily. One example that we recently came across is the Ambition Nation Listed 50 by finnCap (LSE:FCAP, Financial). The British investment bank and stockbroker leverages its proprietary equity analysis tool and comes up with a list composed of the UK's top 50 small-cap and micro-cap public companies with the best blend of growth and quality.
The companies on the list tend to earn a super-normal return on capital and grow at an above-average rate, according to finnCap. Among them, often seen are some other high-quality indicators, such as being founder-led and demonstrating recurring revenue, high cash conversion and low/no debt. Moreover, the smaller size of these quality-growth businesses means that investors can more hopefully land on their next ten-baggers from this group, as opposed to large counterparts like FAANG that have already been through their fast growth phases.
Of course, it is the duty of the investors themselves to carefully examine the business economics (e.g., durable competitive advantage, growth prospect, risk) of these companies and gauge the sustainability of the return and growth, as well as wait patiently for reasonable share prices. This and other lists simply provide a starting point.
The names familiar to us on the list include Craneware (LSE:CRW, Financial), Bioventix (LSE:BVXP, Financial), Tatton Asset Management (LSE:TAM, Financial) and Mortgage Advice Bureau (LSE:MAB1), all of which were covered in our previous articles.
Some other businesses intriguing us include: Focusrite (LSE:TUNE), a music and audio products company; Tracsis (LSE:TRCS), a technology provider for the rail and wider transport industries; and Keystone Law Group (LSE:KEYS, Financial), a technology-driven full-service law firm focused on the "mid-market" niche.
We may take an in-depth look at these companies as candidates to our investable universe, especially the last one. London-based Keystone Law pursues a fundamentally different business model to conventional law firms: lawyers are self-employed, get paid on a variable basis and use the company's provided technology platform to work flexibly and remotely. The company is owner-operated, cash generative and debt-free. It has increased its top line by 25% per year on average for the last three years while enjoying the high operational gearing (i.e., profit grows much faster than revenue) thanks to the highly-scalable model. As of fiscal 2020, Keystone Law generated total sales of 50 million British pounds ($65.61 million) compared with a total addressable market of more than £9 billion according to the management's estimate.
In general, we greatly appreciate this list, although we may question the absence of some other British rising stars such as Team17 (LSE:TM17) and Fevertree (LSE:FEVR).
What is your favorite stock from the List? Feel free to comment below.
Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We own shares of Bioventix, Craneware, Tatton Asset Management, Mortgage Advice Bureau, Team17, and Fevertree.
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