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Steven Chen
Steven Chen
Articles (206)  | Author's Website |

Bond Proxies: Playing Defense for Alpha

When it comes to value investing, the best offense is a good defense


There are several definitions for the term "bond proxy," but I would consider a bond proxy stock as the equity investment in a business that provides reliable and predictable cash returns for the foreseeable future. It does not have to be high yield, which largely depends on the valuation itself, while the recurring and stable nature of the earnings are the key factors here.

Value and quality-oriented investors should agree downside protection is more significant than upside stretch to generate alpha returns. In my opinion, bond proxy stocks are good candidates for investors searching for wonderful businesses. Of course, in many cases, investors do not need to sacrifice higher returns for lower risks as long as such companies have the growth component resulting from internal opportunities to reinvest their earnings and can be bought at reasonable prices.

Below are several bond proxies with free cash flow growth potential.

Craneware PLC (LSE:CRW)

Founded in 1999 and based in Scotland, Craneware is the leader in automated value cycle solutions that help U.S. health care providers discover, convert and optimize assets to achieve the best clinical outcomes and financial performance.

Leveraging a multiyear annuity software-as-a-service revenue model with an over 100% renewal rate by dollar value, the business has been able to deliver stable and growing cash earnings for its owners.

Free cash flow per share has grown by 27% annually since 2005 and return on tangible assets has stayed above 15%.

Source: GuruFocus; data as of July 5.

Source: GuruFocus; data as of July 5.

SimCorp (OCSE:SIM)

SimCorp is the leading provider of investment management software solutions for the world's leading financial organizations, such as banks, pension funds and insurance companies.

As demonstrated below, around three-quarters of the company's revenue comes from aftermarket maintenance and services, which are mostly recurring, for the installed base.

Source: 2018 annual report.

Free cash flow per share has grown by almost 19% annually since 2005 and return on tangible assets has improved from below 10% in 2005 to around 40%.

Source: GuruFocus; data as of July 5.

Source: GuruFocus; data as of July 5.

Bioventix PLC (LSE:BVXP)

Regardless of the complicated science behind the products, Bioventix has a simple but powerful franchise-like business model: licensing the use of antibodies it developed to global health care companies in exchange for royalty payments, which are recurring. As more patients take the test and more of the Bioventix antibody is consumed, the business earns more money.

Free cash flow per share has grown by over 26% annually since 2011 and return on tangible assets has improved from below 35% to over 50% in the meantime.

Source: GuruFocus; data as of July 5.

Source: GuruFocus; data as of July 5.


NIC is the leading provider of digital services that help government agencies use technology to provide a higher level of service to businesses and citizens. Most enterprise partnerships at NIC are funded through a transaction-based funding model, which generates recurring revenue whenever end users (i.e., taxpayers) enjoy efficiency through digital or online services provided by the company (e.g., renewing vehicle registration).

As shown below, the recurring portion of the total sales to state enterprise clients has remained over 95% in recent years.

Source: Investor Presentation, second-quarter 2019.

Thanks to the mission-critical and must-have nature of government services, the recurring income streams at NIC are mostly immune to economic downturns.

As displayed below, the annual free cash flow has been steadily growing over the past 15 years or so. Meanwhile, the return on tangible assets has been improving from below 10% to over 20%.

Source: GuruFocus; data as of July 5.

Source: GuruFocus; data as of July 5.

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About the author:

Steven Chen
Steven CHEN is a quality-focused, business-perspective investor (with bottom-up opportunistic approaches), an ex-hedge fund analyst on Wall Street, a serial entrepreneur, computer scientist, and free-market capitalist.

Steven is the Managing Partner of Urbem Partnership, a value/quality-focused investment partnership fund (www.urbem.capital).

Steven can be reached at [email protected], LinkedIn, or WeChat (ID: LSCHEN2005).

Also, check out his column at Smartkarma on the Asian market - www.smartkarma.com/profiles/steven-chen

Visit Steven Chen's Website

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