The most effective way to generate new stock ideas is not rocket science: it involves burning shoe leather.
Covering small and micro caps, the OC team has a broad universe of stocks to stay abreast of (just under 2,900 stocks are currently in the ex-100 universe) and one of the primary means of identifying the next potential portfolio holdings is through an extensive company visitation program. Each year, our team has more than 700 meetings predominantly with company management, but also with listed and unlisted competitors and independent industry experts. OC has a strong focus on risk and one of the most effective tools we use in identifying new stock ideas is through screening out almost 2,300 “risky” small caps. These stocks are typically unprofitable, overly complex or are undiversified commodity-based businesses. Once we have identified a pool of potential portfolio holdings, we undertake a comprehensive “operational risk assessment” of each company.
OC considers risk to be investing in companies we don’t understand. So we go to great lengths to analyse what we think are the key risk characteristics of a company. We do this by examining the following in depth:
• Management – track record, key man risk, skin in the game, remuneration
• Business model – understandable, barriers to entry
• Operating history – proven, audited track record
• Industry structure – mature, profitable, subject to regulation
• Corporate structure – major shareholders, vanilla equity
• Financial analysis – including valuation
Our recently launched OC Micro-Cap Fund added specialty retailer, Shaver Shop Group (ASX:SSG), to the portfolio after its August market update. The OC team met with management several times before the July IPO including a site visit to its flagship Melbourne Central store, and cross-checked our analysis of the business with various contacts in the retail space. Cameron Fox, a former Gillette executive, who has been in the business for 10 years, has a material stake in the company and is clearly passionate about the products SSG sells. He is ably supported by a strong management team including a highly rated CFO in Larry Hamson.
Shaver Shop operates a relatively straightforward business model (high street retailing), has strong brand recognition and a long-term track record stretching back to when it was founded in 1986.