What is one commonality across most (if not all) new faces in our equity portfolio at Hillside Wealth Management this year? They are the consistent market leaders in their respective spaces. In the meantime, their shares appeared under-appreciated because perhaps the target market is too niche or does not sound “mainstream” enough, or maybe the management does not spend much energy on publicity. As enterprising long-term investors, we would love to take advantage of such opportunities to buy high-quality businesses at reasonable prices. Here, we highlight two examples of this strategy in practice.
Plover Bay (HKSE:01523, Financial) is a Hong Kong-based company providing network equipment and solutions. There is probably no way for this 5 billion Hong Kong dollar ($640 million) company to directly compete with industry giants like Cisco (CSCO, Financial), VMWare (VMW, Financial) or Nokia (OHEL:NOKIA, Financial). But the management at Plover Bay made the right move to develop a portfolio of patented wireless SD-WAN technologies well ahead of peers.
As a result, the company has avoided intense competition and became the leader in this under-rated but still rapidly-growing niche enjoying the tailwind of global 5G rollouts. As of today, we at Hillside estimate that Plover Bay owns approximately 20% of the wireless SD-WAN market. The company operates a capital-light model, outsourcing manufacturing and focusing on R&D.
Nothing can be complained about on the financial side, with a superior return on capital, high cash conversion, double-digit growth rate and no debt. The management says that being in Hong Kong may have partly made the company under-covered as the region is by no means well-known for its technology innovation (you may want to think banking or food here). Earlier this year, we were fortunate to accumulate shares in this high-quality business at a valuation that is almost half the current level at the time of this writing.
U.S.-based National Beverage (FIZZ, Financial) is another market leader that we bought this past year. The company name may look unfamiliar to many. Again, who would care to talk a lot on media about a beverage company that is only 2% to 3% the size of Coca-Cola (KO, Financial) or PepsiCo (PEP, Financial) in terms of market cap?
Even “worse,” the management at National Beverage does not seem excited to talk to the Wall Street community, either. There is no earnings call, investor roadshow, or the like. Luckily, the company does want to chat with us, the long-term investors.
That said, the company’s core product, LaCroix, has won around 15% of the fast-expanding U.S. seltzer market and has become the most “Instagram-able” beverage name among millennials in the country. The brand equity has enabled the company to deliver high-return, high-growth results to long-term shareholders with a debt-free balance sheet and rich cash payouts on a consistent basis. To echo the holiday season, the company just announced a special cash dividend that indicates an annualized yield of nearly 6% based on the current share price at the time of this writing – we are glad to have accumulated shares in National Beverage at an even lower valuation (i.e., a higher implied yield) this year.
In conclusion, we are strong believers that winners tend to keep winning in the competitive business world, and therefore, would incline ourselves to stay away from turnarounds and instead concentrate on companies that have already excelled. But Mr. Market is often smart and rational, putting those market leaders at a premium valuation (which inevitably lowers the expected total return). To tackle this, our solution is simple and straightforward – to persistently turn over as many rocks as we can across the globe. We will remain patient until the next gem shows up.
Happy holidays! Happy investing! Have a fruitful year ahead!
This article was written by the author and first appeared in Hillside Wealth Management's monthly newsletter.
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. I/We have position(s) in any of the securities referenced in this article.