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Stocks to watch in 2025: Under-the-radar US tech, volatility plays, and a potential UK monopoly?
1.4k Plays3 months ago
Happy New Year, and welcome to the first episode of 2025! In this episode, Lawrence quizzes Graham Neary and Megan Boxall about 6 of the stocks on their watchlists for 2025.
If you enjoyed this, you can read daily analysis on noteworthy and hard-to-research shares with Stockopedia’s Daily Stock Market Report. You’ll also unlock award-winning investing insights, tools, and education to speed up your research process and help you make more informed decisions.
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Stocks we discuss
Relx: https://www.stockopedia.com/share-prices/relx-LON:REL
Trustpilot: https://www.stockopedia.com/share-prices/trustpilot-LON:TRST/
Garmin: https://www.stockopedia.com/share-prices/garmin-NYQ:GRMN/
Tristel: https://www.stockopedia.com/share-prices/tristel-LON:TSTL/
CMC Markets: https://www.stockopedia.com/share-prices/cmc-markets-LON:CMCX/
Polar Capital Holdings: https://www.stockopedia.com/share-prices/polar-capital-holdings-LON:POLR/
Extra Stockopedia content we mention:
Sign up for our January webinars here: https://www.stockopedia.com/academy/events/
Host: Lawrence Judd
Analysts: Megan Boxall, Graham Neary
Let us know what you thought of this episode: https://www.surveymonkey.com/r/NG3L235
Disclosures:
At the time of recording, Lawrence holds shares in CMC Markets (CMCX).
Disclaimer: We do not provide personalised financial advice. None of our content constitutes or should be understood as constituting a recommendation to enter in any securities transactions or to engage in any investment strategies discussed in our content. We do not provide personalised recommendations or views as to whether a stock or investment approach is suited to the financial needs of a specific individual. It is very important to do your own analysis before making any investment based on your own personal circumstances.
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Transcript
Introduction and New Year Greetings
00:00:05
Speaker
Hello, and welcome to the first episode of Companies and Markets Weekly of 2025. Happy New Year. I'm joined today ah by Megan Boxall. Hello, Megan. Hi, Happy New Year, everyone. Happy New Year. I'm also joined today by Graham Neary. Hi, Graham.
00:00:22
Speaker
Happy New Year. Happy New Year to you, too.
Pre-recording Note and Stock Discussion Setup
00:00:25
Speaker
um We are pre-recording this. We're recording this on the 20th of December, 2024. So we're speaking to you from the distant past. and But what that does mean, we are going to be talking about some specific stocks today. um Megan and Graham are undoubtedly going to be talking.
00:00:43
Speaker
ah specific bits of data like share prices and certain ratios um obviously bear in mind that these may have changed slightly since recorded so all the data that we talk about was accurate at the time of recording um hopefully it's not changed too much since then but just bear that in mind.
2025 Stock Watchlist Selection Process
00:01:00
Speaker
I'm going to talk a little bit to the panel about how they've gone about selecting stocks for their 2025 watch lists and then We've picked a handful of them and we're going to dive a little deeper into some of the specific stocks that they are interested in. I believe that stock media subscribers can ah get the full watch lists on the platform as well. and Just before we get into that ah brief disclaimer, um obviously this is not financial advice. Stocks can go down as well as up. ah We also
00:01:39
Speaker
may well hold some of the stocks that we are talking about. Where we do, we are going to disclose that. We'll try to do so verbally, and if not, those disclosures will be available in the episode ah description.
Market Outlook with Megan
00:01:51
Speaker
ah What's your general outlook for the year, Megan Graham?
00:01:56
Speaker
Um, to be honest, quite cautiously optimistic. I have spent a little bit of time over the last couple of days sort of reviewing the year gone. And I think, I think there are,
00:02:14
Speaker
I think there are things like as we close off the year that there is worth finding optimism and and positivity in. i think um i think it it's ah I do think it's a difficult time to be an investor. I think it's quite difficult time to be a private investor in particular. um ah ah especially a stock picker. um I am finding it extremely difficult to make a fundamental valuation investment case um based on the kind of logic and sound rationale that I have done in the past. um But I am feeling relatively optimistic about the outlook for the markets as a whole. I think ah the US markets
00:02:59
Speaker
I can't really see what's going to cause them to stumble in 2025. And I'm hoping, I'm hopeful that in the UK, there'll be a bit of a turnaround in sentiment there. I don't know, Graham, if you feel the same way. I don't know if it's ah just a bit of Christmas cheer that is creeping into my mindset.
Graham on Overvaluation and Stock Selection
00:03:20
Speaker
Yeah, I think it's ah it's a good time to to look at individual stocks because The, um you know, the magnificent seven, I think most of them by conventional standards are objectively overvalued now. ah That's not to say that they can't keep going up and or that they might not outperform expert expectations. But um the idea of just passively buying
00:03:53
Speaker
ah the Magnificent Seven, which is so heavy now in in them in the market indexes is not something ah that um I would be too hot on. So I think it's a good time to pick stocks, um especially in the UK with a huge discrepancy against the
Megan's Long-term Investment Strategy
00:04:14
Speaker
American valuations, and finding decent stocks here. I would say we can look forward to plenty more takeover bids in the new year, unless something changes.
00:04:26
Speaker
Nice. um We're going to come on to ah the specific stocks that you are thinking of picking ah in the next year in a second, but I wanted to drill down a little bit into your both of your processes for um finding stocks for your watch lists, adding them and and sort of picking the best candidates among them. ah Megan, do you want to start?
00:04:49
Speaker
Yeah, I can do. So I think um for me, I'm very much a long term investor. I i don't um have as much time as I would like to um do research for myself, ah research for my own personal portfolio. so ah partly Partly it's a time thing, partly it's ah it's a a money thing, partly it's an age thing. I'm 32 so I am very much an investor looking for long-term gains. It's also where I actually like to look for companies as well. I love quality companies, I i love investing in companies in the US and also the higher quality names in the UK and you'll see with all three of my picks
00:05:28
Speaker
that we're going to talk about today are very high quality companies. um so ah yeah have with With that in mind, I have set up some screens to help me try and identify companies which fit that um which fit that style of investing, so long-term compounding quality. um i have ah I have a number of screens. I find that ah the screens that I've set up, they need to be tweaked slightly dependent on the market cap size and the and the geography that I'm looking in, so I have got a number of different screens.
00:05:58
Speaker
um I also am very very keen to ah to identify stocks in sectors or areas that I think there are still so strong trends at play and I do believe that AI continues to be a very, very strong ah trend that will continue to provide um buoyancy in the market for in 2025. So I've got a specific technology um screen, which aims to identify, it's it's called ah high quality, high performing tech stocks. And I've actually whittled it down to the UK. It's only got three companies that have come out of it. And one of them is one of my picks. um
00:06:40
Speaker
And ah yeah, my and my other screens have helped me identify um the other two stocks I'll talk about today. So yeah, ah a mixture of my personal outlook, take on investing, and some screens to help me whittle down um the the names. um And then, and then yeah, I've done a little bit of research, i had a look at the valuations.
00:07:03
Speaker
And I would say that all three of these stocks I'm going to talk about are on my watch list. I'm not buying them yet. I'm still thinking. Graham, how about you?
Graham's Stock Review and Watchlist Approach
00:07:16
Speaker
So my process is pretty simple. I have ah the luxury of being able to study ah RNS is most days. Stockapedia members can can see a spreadsheet that we maintain which shows the views of all the writers on all the stocks we cover. So ah I simply go back and see which stocks I liked the best from that spreadsheet and then I decide if
00:07:49
Speaker
any of them are worth joining the watch list in the new year. and My default is to ah leave ah stocks on the watch list each year. So you know if something was on the watch list last year, it will probably be on the watch list this year.
00:08:07
Speaker
unless ah something's changed in my view in which case it could be up for a substitution so that's that's my process i tend to stick to sectors i i feel i understand ah reasonably well so.
00:08:24
Speaker
and As I've said in another podcast, ah I'm not very well diversified in terms of sector, but that's just because if I want to put something on my watch list, I want to feel like I understand it um as well as possible. It reminds me a little bit of a story I heard about. I think it was and a professional investor who would keep a stack of Financial Times papers on his desk and every day he would put that day's FT on top, but then pull out the bottom one from a year ago. And if the trends had stayed, like if something was talked about a year ago and was still talked about today, only then would he consider going and investing in it. So it reminds me of that a little bit. I have no idea where that story came from. I may be making it up. Who knows? Megan, what's your first cab off the rank in terms of the stocks are on your watch list?
Megan's Analysis of Garmin
00:09:19
Speaker
I'm gonna start with Garmin because um as I say I like US stocks um and I think as of right now on the 20th of December 2024 this is one of the best. It is a really great company and I am sad that I didn't buy at the start of this year because it's had a fantastic year um and I believe it can keep delivering. So do you want to run through ah just very briefly what does it do, how does it make its money and what opportunity you see here?
00:09:56
Speaker
Yeah, so Garmin is, um well, probably best known, dependent on who you are um for ah be being a GPS ah specialist in GPS tracking. ah The actual device that you know it for, I guess, depends on on who you are and and what you have used it for. Garmin um um and was very popular pre-Google Maps for being a navigational device for people's cars, and it still does have a sector that operates in the automotive industry, although that looks somewhat different um now than it did how it did when Garmin and TomTom were the leading um navigation companies in the automotive sector.
00:10:38
Speaker
If you're more of an outdoorsy type, you probably know Garmin for its watches, its wearable devices. Wearable devices are far and away the biggest divisions. It splits them into two two of its operating divisions. ah So one is one is outdoors and one is fitness, um fitness wear, so smart watches for tracking exercise.
00:11:01
Speaker
um yeah It also ah makes ah devices for your bike, so which you can clip onto your bike for navigating and for your if you're cycling and also if you're into golf. One of my colleagues ah swears by his Garmin
00:11:21
Speaker
Garmin hole finder. um I do play golf. I have never felt the need to need to use a Garmin to find the golf hole, but he yeah he swears by it and he yeah he he thinks it it's changed his game. So um so yeah, lots of lots of different operating subsidiaries, but all revolving around ah GPS.
00:11:44
Speaker
why Are there any competitors that are listed and investable? I think the biggest competitor for Garmin is actually Apple. um it's a funny It's a funny comparable because I think as a user, you probably wouldn't think they are.
00:12:01
Speaker
similar companies. mean Most people use Apple for their phones and Macs and iPads. Obviously, it does have the watch division as well. um Garmin is more the wearable devices and the and the GPS navigation, but they're both they're they're both computer companies. They're both text tech companies. um And they but both have they operate in a very similar way. um Garmin, more on the hardware side, Apple is shifting more and more and into the software side of things, and obviously now its services division is a key element of the growth story at Apple. um like Whereas Garmin um um and makes hardware rather than software, so services are a smaller part. It does have an app. The Garmin app is fantastic. um It's a very, very good app, but it's a free app.
00:12:47
Speaker
um And so yeah, i do i I would say that they are quite a similar profile. I think looking at that looking at Apple, if you're if you're more familiar with the Apple investment case, I'd say investors maybe look at Garmin in a similar way. They're trading on very similar multiples at the moment as well. You said at this the the top of the episode that you're not looking to buy anything on your watch list just yet.
00:13:14
Speaker
Well, that's mainly because I feel like I need to ah do a little bit more research. By the time you're listening to this, i may have I may have done it. But if that is the case, you will know because it will be in the show notes. But as of the 20th of December, I'm not a holder. The reason I'm a little bit hesitant about Garmin right this second is mainly because of that um momentum and that share price trajectory from the last year. So shares are up 60% in the year to date at the time of recording, so in 2024. So it's had a really, really great year. Justified ah somewhat by the fact that earnings, it it's hit, well it's far exceeded all of the earnings, the quarterly earnings it's reported in 2024.
00:13:54
Speaker
And as such, the earnings expectations for the year have been increasing. And that's a key thing that we've seen in a lot of the research we've done around identifying multi-baggers, shares that multiply um in value. um and yeah yeah and And that's the stocks that ah the earnings expectations keep getting higher and higher. So if Garmin can keep achieving that, I have no doubt that that share price trajectory will continue.
00:14:22
Speaker
The thing that makes me a little bit hesitant about whether or not that can continue is um is what happens what what could happen to the US market in particular from a factor perspective in 2025. Momentum has been a real driver a real factor driver in the markets in 2024 and it's quite rare for momentum to be the factor that drives markets in consecutive years And I think if momentum does start to s stall a little bit, companies that do have quite lofty valuations, which have had very, very good 2024s, may not be able to keep up the pace unless they're fundamentals, unless their their earnings can. um Garmin revenue is is growing strongly, especially in its three smaller divisions, um which are Marine,
00:15:17
Speaker
automotive and aviation. The fitness and out outdoor sections are growing at a slightly lesser rate um but ava aviation marine and auto um are high, ah well ah aviation marine in particular are high margin.
00:15:35
Speaker
parts of the business, especially at the gross level. um So i i I am optimistic about the Outlook for Garmin in 2025, but yeah, it's just that it just that valuation which um ah concerns me a little bit at the time of recording.
00:15:54
Speaker
interesting stuff. ah I'm going to make sure that we link to all of the stock reports on Stockopedia for all of the stocks we're talking about today. So if you want to go and check those valuation metrics out for yourself, ah you can do so using the link in the show notes. ah Graham, what's your first pick?
Graham's Pick: CMC Markets
00:16:12
Speaker
ah Thanks, Lawrence. My first pick is CMC Markets with the ticker CMCX.
00:16:21
Speaker
and The market cap here is 700 million pounds or so. and This stock was on my 2024 watch list and I'm leaning towards ah keeping it on the watch list for 2025. It has produced a total return of something like 150% so far in 2024.
00:16:55
Speaker
But I think even even after generating that return, I think I can still make a case for it. um So I am a long-term shareholder in IG Group, which is a competitor to CMC. I'm also ah someone who's followed ah plus 500,
00:17:19
Speaker
ah in a lot of detail over the years. So I like these ah sort of CFD, Forex, spread betting companies, because and they tend to be and they tend to be very profitable, ah but the the risk you take with with them is, well, you take regulatory risk, for one thing, and and the industry is much more regulated now than it was before. ah You also take the risk of demand and ah trading activity falling away, which which happens from time to time. And it's it's not easy to predict ah trading activity. ah One thing ah that you can sort of watch is the volatility index or the VIX.
00:18:18
Speaker
ah Because in periods of high volatility, you tend to get high high levels of trading. and But apart from that, there's really not much you can do. and Now, in terms of CMC itself, ah probably ah the first fact that you need to be aware of is and Lord Crotus being ah fifty nine or sixty percent a shareholder.
00:18:49
Speaker
ah and he remains ah he remains in charge here. So we've got a very, very well aligned sort of founder figure as the CEO. And him in terms of the outlook where we're going from here, and I had an interesting back and forth in the comments section of our daily report back in November.
00:19:18
Speaker
um If I try to summarize what's happened, essentially it looks as if um CMC has makes very little effort to ah get the city to ah accurately estimate its results. And it's not CMC's fault, it's just ah I guess well it is CMC's fault in the sense that they don't help the analysts to get the forecasts more accurate, um but it's not a crime and it doesn't really hurt anybody except ah people can get a bit confused about what CMC is actually going to earn.
00:20:01
Speaker
so and For example, um in H1 this year, CMC generated ah nearly 180 million pounds of net operating income. and That's ah more than half, well over half of the full year forecast.
00:20:23
Speaker
so When CMC released its interim results, it said they were in line with expectations. and As a result, people are thinking, well, H2s must be pretty bad then. And the shares have come off ah quite a bit um since since that statement. um However, if you look at what happened in the previous financial year, CMC was very, very slow to um upgrade its forecasts. And even even with just a couple of months left,
00:21:02
Speaker
They put out a range that was well below what they eventually earned. So I'm not saying that CMC are definitely going to beat their forecasts. I just think the forecasts aren't really worth much. and It's worth looking at this company forgetting the forecast, almost. um But it looks to me as if it's still trading on a on a nice ah PE multiple. No matter what forecast you use, it's it's not looking overly expensive, maybe 11 times earnings or something like that, um generating very high returns and and probably
00:21:44
Speaker
ah Well, I can't really say that we will probably have a volatile year next year, but ah the VIX has been more elevated after the recent Federal Reserve and that decisions and announcements. So there could be a pickup in volatility, which will give CMC a boost towards the end of the financial year, which which ends in March.
00:22:07
Speaker
ah So, ah yeah, I'm still a fan of this company. I still think the valuation is reasonable. And ah they have a very exciting deal with Revolut where they provide back end trading infrastructure to Revolut. So it's not just B2C, it's B2B as well. ah Their technology is so good they can they can effectively ah license it to to ah you know other successful ah companies. So yeah, I think there's a lot to like here.
00:22:41
Speaker
You said earlier you were a long time holder of IG and you've also followed plus 500, obviously two companies within very much the same sphere as a CMC markets. What's your reason? is is Is it that what you've just said? Is that your main reason for putting CMC on your watch list? or Or do you think there are, why do you think that CMC is the better opportunity out of those three currently? Obviously not withstanding the fact that you hold IG.
00:23:08
Speaker
Yeah, I mean, I hold IG because I've always held IG effectively. IG is bigger. and The difference with IG, I guess, is that its root results are a little bit less volatile because it's so much bigger. ah In the case of CMC, ah its profits can eventually can can effectively disappear if trading is extremely light. So if people aren't trading, CMC's profits go to zero. And that that is what created the enormous opportunity in CMC shares a year ago. ah Because when you have this sort of operational leverage with a lot of fixed costs and with revenue that goes up and down, and it's it's a risk and it's an opportunity. So I think
00:24:07
Speaker
CMC still has this opportunity to produce a higher rate of profit growth. um so In that sense, it's a little bit riskier, but I guess I like the risk reward. and In the case of plus 500, it's sort of in its own category. um it's i mean It's an international company, but I sort of consider it to be a foreign operator.
00:24:37
Speaker
and There's a few very specific issues with plus 500, but yeah, CMC is my preferred pick. and Obviously, with as you said earlier, with companies like this,
00:24:50
Speaker
a lot of the revenue is very dependent at the moment on ah volatility and so the amount basically the amount of trading that's that's going on. um There might well be an argument to make that years like 2024 are kind of as good as it gets for companies like this with the VIX spiking massively mid-year. Does the deal with Revolut help offset some of that risk or ah is it all still tied in?
00:25:17
Speaker
yeah i mean I would like to get like detailed numbers on what the Revolut deal is worth, but it's it's not the only deal that CMC has. They're active in New Zealand. ah There's various other companies that have or will use CMC's infrastructure. So that's something that kind of, ah I would say, reduces the risk to some extent, and because it's just ah it should be fairly high high margin work. um But yeah, there's no getting away from the fact that so if we have a very quiet year, CMC's results are going to so are going to suffer. um No question about that.
00:26:09
Speaker
And what about its balance sheet? it's It apparently has net cash, but do you think he's doing enough with that cash? Yeah, I mean, I'm comfortable with that. I think the balance sheet is worth 400 million pounds ah from memory. and And so that was something that i initially that initially attracted me to the share was I noticed that it was trading well below that. So it's got a very liquid ah very rich balance sheet, and which it should have and because of what it does. and It pays a ah modest dividend. So yeah, i've got I've got no concerns there. We will let wrap up CMCX there. Megan, we're going to come on to your second stock. Which one are you picking?
Megan's Choice: Relx as a Strong Investment
00:27:02
Speaker
ah Talk about relics next, staying on the large cap side of things for now. um
00:27:09
Speaker
Well, it's a stock that I have talked about quite a lot before. I like it a lot. I think it's a, it's a really great company. This is the company that emerged as one of the three in my um high quality, ah high quality, high performing UK tech stocks. um The other two were actually one that Graham is going to come on to talk about. And ah the final one was Rightmove, which has been a takeover target this year, which is potentially explain some of its outperformance. Rellex is a FTSE 100 company. It operates across four divisions, um probably best known from a consumer perspective for its medical and some more scientific journals like The Lancet, um one of the biggest scientific journals which it owns, and also its legal um legal data and support. its ah
00:28:07
Speaker
ah well, content business, I guess. um But the most exciting division, oh, and sorry, not the most exciting division, but as ah as an investor, but maybe the most exciting division as a consumer is its events business, it owns Comic-Con. So ah that's when I used to work at the investor's chronicle, the picture that we always used to use was a picture of Comic-Con. So, but yeah, the most exciting division as a investor is the risk business. um So the risk business is where the company um it it's ah It provides data analytics to businesses and governments. It has a lot of very, very sticky customers. um And they found the company has said in the last well few years that demand for financial crime and fraud investigations and also just the shifting dynamics of the insurance market have provided a huge boost to that risk business, which is growing very, very quickly. It's also
00:29:03
Speaker
the division with the widest operating margins, and it's the division which has the most exposure to AI. So that is why I think despite another fantastic year for relics, um I believe it will continue to do well in 2025. It seems like a fun combination to be fighting cybercrime and fantasy crime all at once. Yeah. So Sounds like a relatively complex business making money from lots of different divisions. la To be honest, I don't think it's actually that complicated. I think um i think it is a very under the radar business considering I'm pretty sure it's one of the top 10 largest companies in the UK at the moment. It certainly has been um a number of times.
00:29:53
Speaker
And it doesn't tend to get an awful lot of coverage compared to, say, the big banks or the big pharmaceutical companies. It tends to fly under the radar because it doesn't really do an awful lot of um of consumer facing things. most of Most of what it does is business to business.
00:30:09
Speaker
and it ah We talked in a ah in a podcast earlier, what at the end of last year, about nice reporting. um Relic sets out its financial results very, very clearly.
00:30:22
Speaker
it It's chief executive, it's management, well, it's chief financial officer more than a chief executive actually, is always on the end of the phone, which is something that I find extremely impressive about some of these bigger companies. um As a journalist, ah it especially as a um ah journalist for smaller publications, it's often very hard to access. and management for FTSE 100 companies. But I've met the senior executives at Relex on a number of occasions. They're brilliant. They always are available to answer questions. um One of the things that tends to crop up with Relex is it does have quite high gearing. it um
00:30:58
Speaker
Yeah, it it has um it does it it has a relatively high debt position. And that gearing tends to be hiked up at the start of the year. So when it announces its annual results, and that's because it pays the bigger chunk of its dividend in the in the second half of the year. So and yeah, in in the first six months of 2025, we'll see that that gearing um figure be slightly higher than it will be in the second six months of the year.
00:31:28
Speaker
And it's a query that tends to crop up every every year. um And ah Nick Love, who's the chief financial officer, is is always willing to answer the answer the question about why why we shouldn't be worried about gearing.
00:31:43
Speaker
I think gearing has been a i it could have been more of a concern and while interest rates have been higher, and but as interest rates continue to come down, gearing should become less of a problem for relics.
00:31:57
Speaker
but um but yeah so i'd say ah probably relatively challenging to get your head around all the different operating subsidiaries. But as a as a business, and yeah it's not it's not too complicated. It's a revenue, high high margins at the gross level, very high margins at the operating level. They tend to average around 25%. Yeah, ah high quality, highly cash generative, dividend paying company. um Lots of ticks. Yeah, what's not to love?
00:32:30
Speaker
um When you've been researching this, what is there anything you want to do more research on? Any questions for you that are still left unanswered about Relax that you want to dig into? Yeah, so i I think one of the things is that exposure to AI and whether or not it's going to be disruptive to companies like Relux before it is productive. um I think um companies pay companies which are paying subscriptions to Relux, so for for its fine for its ah scientific journals and for its legal um it's it's legal content as well.
00:33:09
Speaker
there could be a potential disruption to those businesses um as we have more large language models, as um as data becomes easier to get hold of, and as information becomes easier to get hold of.
00:33:23
Speaker
But I think in the long term, there's almost no doubt about the way Relics is positioned, um that it will be a beneficiary from the move to AI. um Large language models and a lot of other applications of AI benefit or rely, sorry, I should say, on um on data centers. And Relics owns huge volumes of data because of the nature of its business. It it manages risk for big organizations, including governments, and owning that data and running those databases puts it in a very, very strong position when it comes to teaching large language models and other
00:34:00
Speaker
ah applications of AI because it owns hugely high quality data. um So I think that that is a very exciting potential upside for Relics. But why I would like to do a little bit more research from this point is how long it will take for um so the company to really benefit from that trend. I think companies like video and Broadcom and the the semiconductors and the hardware and software companies, they're clearly very, very instant beneficiaries of AI because we need them to to start getting the AI stuff up and running. But I think potentially companies like Relics could be ah later on beneficiaries. um So whether or not the timing is quite right at this level, I'm not sure. and
00:34:51
Speaker
It's had a good year, just like Garmin. The shares are up 19% in the year-to-date in 2024. Obviously, not quite as spectacular as Garmin, but when you think about where the UK markets have gone in that time compared to the US s markets, it has it's it's probably quite comparable. um So yeah, whether whether that can continue next year, um I think will be a little bit dependent on that continued growth from the new AI space. um The one other slight question
00:35:24
Speaker
that I have about it is if there are other companies that are similarly placed to benefit. There's a Dutch company called Woltersklur.
00:35:38
Speaker
I'm sure Dutch people would pronounce it better, um which is is a similar business. um It's a little bit smaller, so it's growing a little bit faster. And I wonder if maybe that might be a better opportunity for right now. um But both companies benefit from the same extremely high barriers to entry because of because of these data centers. So ah yeah, I like them both a lot. Nice. And yeah, I'm sure we will get messages correcting our pronunciation of Walter's. Clervagh, no idea. Your guess is as good as mine. Graham, what's next on your list?
00:36:14
Speaker
ah Yeah, so I think next I would mention and polar Polar Capital with the ticker POLR.
Graham on Polar Capital
00:36:23
Speaker
market cap, as I speak, of about £520 million. pounds and This is another company from ah last year's watch list, which I am inclined to... Actually, no, it was a new entrant this year ah in 2024, and I'm inclined to leave it for the 2025 list. So it'll be this will be its second year on the watch list. And um the reason I'm highlighting this one is
00:36:54
Speaker
It's pretty much the only fund manager ah that has been enjoying inflows. So the entire fund management industry has been suffering. And and if you look at Polar and its ah quoted peers, I'm not sure maybe you'll find one other company with an inflow, but they're pretty much all suffering outflows.
00:37:22
Speaker
ah I think Polar's success is down to the fact that it ah focused on technology, which did extremely well. It branched out to to healthcare, which did extremely well. and And it has continued to diversify. It has a big insurance ah section as well. And and the really, really ah big winner over H1 of this year has been emerging markets and ah Asia, ah where it has enjoyed inflows of £900 million pounds in six months. So a huge result for but for polar there. ah Total AUM is
00:38:15
Speaker
23 billion pounds. so and that was a ah you know That was a big win over six months to get 900 million of inflows into their Asian funds. and It looks as if and the um ah Basically, people have been switching from competitors into polar. That's that's the explanation that polar is given. and It makes perfect sense because ah you know the industry as a whole has not been enjoying inflows. so if you If you are getting inflows, there's a good chance you're actually just getting money that's come from another fund fund manager.
00:39:00
Speaker
ah so Polar's AUM, as I say, it's continued rising. They've given a number of $24 billion, actually, for for ah November 2024, early November. I'm sure there'll there'll be another update soon. um But these shares trade at about 10 times earnings or so. If you check the valuation relative to assets under management, it is admittedly a lot more expensive
00:39:31
Speaker
than other fund managers. um But i I would say that's probably justified because ah investors are still pouring money into Polar and Polar has ah you know a great reputation in technology, healthcare, insurance, and I suppose there is a risk as it continues to branch out that and this niche that it built could be diluted. On the other hand, there is a chance that it just becomes
00:40:07
Speaker
ah you know a very prestigious name in fund management and that the you know and that its competitors sort of ah continue to struggle. um If I was to point out a risk, 42% of AUM is in technology. and If you look at its top holdings, so for example, and the Global Technology Fund with £5.5 billion pounds of AUM,
00:40:36
Speaker
and just checking its ah top holdings there. The very top holding that that ah fund has is NVIDIA, which is 9% of the fund. And if you scroll down there, you've got Microsoft, Alphabet, ah Meta, which is Facebook. and So if you do think that... These ah leaders are are about to are about to fall off a cliff. um I guess that's that's a risk factor. and But you know I would say that you know personally, I'd be willing to look past that. And in terms of its capacity, it says that its existing funds could manage up to 64 billion pounds.
00:41:27
Speaker
and from the current level. so They think they could manage far more than they currently do with their existing ah fund platform. and They've recently launched a small companies ah fund, which I think is interesting. and so yeah I'm um'm happy to stay positive on this one. I only put it on the watch list for the first time in 2024.
00:41:51
Speaker
and It has generated a positive return ah so far this year, and I'm inclined to give it ah another chance for 2025. Great. I'm assuming a lot of its funds are actively managed. so is there Do you see any sort of key person risk? like Are there any fund managers there who've done really well recently, who might be at risk of leaving?
00:42:15
Speaker
Yeah, and they are actively managed. and Just looking at some of their biggest funds, they have an active share of about 60% to 70%. So that's that's a very good active share, in my opinion. I suppose it could be bigger, but it's ah you know it's ah that's a proper active fund.
00:42:36
Speaker
and In terms of Starphone managers, I'm not really ah umm not really aware of any major risk on that front, but um certainly I'd be open to to information there. But as far as far as I know they've got you know, they've got a whole bunch of autonomous teams, semi-autonomous teams. They work independently under a common structure.
00:43:01
Speaker
and I think the name of the of the company is is really valuable now. you know it's It's got a valuable brand name in polar in polar capital, and yeah that's where I see the value.
00:43:16
Speaker
Finally, as a as a DIY investor or a private investor, I guess that there is a choice between buying polar capitals, funds that are listed, so there's the the tech trust, global health care. What's your thesis behind owning the parent company rather than investing into the into the funds themselves? Yeah, so I mean, that's a great great question, Lawrence. and um i I've been sort of um actually been thinking about that a little bit recently that you know a lot of private investors will just buy a fund, you know but then when you go a little step further and you want to research individual names, then you have the opportunity to buy the companies that manage the funds. and The opportunity there is you get and the potential for
00:44:14
Speaker
compounding wealth, you are earning effectively the fees that other investors are paying, and you are earning these you are earning these management charges. so you know In a perfect world, you buy a fund management company,
00:44:33
Speaker
And it benefits from inflows, it benefits from rising stock markets, all of these things, growing management fees over time in a compounded way. And the other great benefit of fund management companies, as I alluded to, is that once they build their platform,
00:44:58
Speaker
all the growth just gets thrown on top with additional fees without much additional cost. so that's the The beauty of a successful fund manager is it can just keep growing its assets, growing its fees, and its costs should not have to rise very much once it's built the platform. so In the case of Polar, 64 billion pounds of capacity is what is what they they claim The downside, of course, is that inflows aren't guaranteed. ah Funds can underperform the trend and for different types of fund and different types of investing can change. And some fund management companies have been very poor investments. and So there is that bit of work required to say, well, are these guys good at what they do? Are the trends in their favor?
00:45:57
Speaker
What I always do with fund management companies is I look for companies that have a niche, that have a good brand name, and that do something ideally that a private investor would be unable to replicate. and so You could argue that you know this technology fund, for example, could be replicated. You could just buy ah Microsoft and Nvidia and Apple and so on. and But I suppose that's that's the challenge is saying, well, I think the technology trust will remain attractive. and
00:46:39
Speaker
The polar capital's funds do have a good long-term performance track record. They generally ah are in the first or second quartile over the long run or since inception. More recently, their funds haven't been doing quite so well over the last three years, say. ah But um I suppose this is the challenge. and ah But I think a successful fund manager ah should outperform its funds, definitely.
00:47:08
Speaker
I also assume there's a nice dividend being paid. and Yeah, so Polar polar is is paying is paying a ah chunky dividend. I don't know. ah I wouldn't invest in it for the dividend because it's so big that um you know you'd wonder you know you can't invest on a 9% yield and presume that you're going to get that forever. So I wouldn't invest in Polar for the dividend, but but yes, they they do have a strike record of paying out to shareholders. Excellent. Megan, what's your final pick for your watchlist?
Tristel's Market Expansion Potential
00:47:46
Speaker
My final pick is Tristel. um I must admit that I actually, I followed Graham's way of of finding this stock rather than my um my aim to be slightly more systematic and use screens. I was looking at Tristel ahead of its AGM, which was ah the week just before Christmas.
00:48:08
Speaker
And it's a stock that I have been interested in for a very long time. It's a stock that I followed for a very long time. and It's a stock which every single year disappoints for exactly the same reason. um And I am interested in it this year because 2025 might finally be the year that Tracelle cracks the US because it has failed to do so again in 2024.
00:48:33
Speaker
So that is why, so yeah, that it's it's stumbled onto my watch list because I was interested in it ahead of its AGM and and now I'm going to look at it a little bit more because it's actually got a new chief executive and I'm not suggesting in any way that it was the old chief executive's fault that Tristel never quite managed to get its products um flying in the US. The old chief executive was actually the founder And he was very, very good, um apart from the fact that he was taking quite a lot of money out, which always seemed to surprise me. He owned, obviously he was the founder, he owned
00:49:12
Speaker
huge chunks of it. And every year he was selling down um where his money would probably have been worth quite a lot more if he had just held on. But anyway, new chief executive, he's called Matt Tassoni. He's very good. He has experience in the US. He has experience in small mid-cap farmer and ah potentially he's going to be the one who helps get the company selling its products properly in America. So what does Tristel sell?
00:49:41
Speaker
So Tristel is a hospital disinfectant company so it has proprietary technology I suppose based on chlorine hydroxide solution which is um prior to Tristel founding um hospital implements were disinfected using um yeah using disinfectants that were were actually toxic. um And then Tracelle came along with its chlorine hydroxide and ah revolutionized the hospital equipment disinfectant market in the UK. It's now the gold standard for hospital disinfectant. and it it's ah It's surface wipes and um cleaning products for implements like
00:50:28
Speaker
ah I don't know, implements that use in hospitals, scalpels, I guess, I'm not sure. um ah All sorts of different equipment that's used in hospitals, ultrasound equipment, urology equipment, stuff like that. um And stuff that obviously needs cleaning very, well very thoroughly.
00:50:46
Speaker
and In the UK, the market has, I suppose, been easier to saturate than in other geographies because of the NHS. We have got one healthcare care supplier. It doesn't mean that in the UK, there's literally one customer for Tristel and this was something that I found very, very interesting when I spoke to the company during COVID.
00:51:10
Speaker
they said, or the chief executive at the time said that he was really shocked that individual hospital trusts were competing for supply, because supply was obviously constrained during the pandemic. And he said that they were finding that a hospital trust was ringing up and being like, we need a million pounds more and they'd have to be like well we just sold a million pounds worth to your mates down the road so we can't provide you with be what what you need and I mean I think that's an extraordinary lack of efficiency within our
00:51:47
Speaker
wonderful healthcare system. But yeah, it was an interesting interesting dynamic for a company like Tristel during the pandemic. So anyway, yeah, a gold standard of of hospital disinfectant in the UK. It occupies most of the market. There is no real growth to be had in the UK anymore, unless it expands to new products, which it has done recently. It's launched a new ah suite of products, which are the surface disinfectant wipes.
00:52:15
Speaker
um And they're selling well. They're a tiny fraction of sales at the moment, but that could provide some growth. But the main growth for the company does come from international expansion, and it has done very well to get its products into a lot of international markets. But it is that US market which it just cannot quite crack. And um the reason what that it wants to so badly is because it's such a big market. The US healthcare care market is enormous. It's the biggest in the world. And um yeah being able to have a strong foothold there would be great for the company. So, um yeah, it'd be interesting to see what what Matt Sassoni can do. Yeah, I was going to ask what what the what the market size was relative to the UK, for example, because it's yeah obviously it'll be much bigger, but like how much bigger are we talking?
00:53:02
Speaker
I don't have the figures, but is it's significantly bigger, not only because obviously there are more people, it's a bigger country, but also because of the way um the way America is. like It's 50 countries, and each state does have its own healthcare system, its own um own hospitals, its own insurance. The the the way that the way that healthcare care works there means that it is just an exceptionally profitable market. um I suppose the yeah the the political um situation in the US is potentially a ah challenge that the company needs to overcome, but I think mainly just getting a foothold there, making sure it's selling slightly more efficiently than it has been doing in the past. It has tried to sell via its own channels, it has tried to sell via partners and distributors,
00:54:00
Speaker
It's just never really got going properly. um So yeah, the size of the market is is enormous. and And crucially, it's that growth that um is is very important and very needed um for for investors um in this company. um So yeah, it'll be interesting to see what what happens next year.
00:54:20
Speaker
Yeah, definitely. I'm assuming there are also some some incumbents in the US market as well that they would need to abandon. Yeah, there are, but this is the other reason why it's it's ah it's an interesting market because as far as I'm aware, there isn't one incumbent. it's It's not like there is a market that there is a comp there is a company which which disinfects all ah the medical implements in in America. there's There's hundreds of them and there's hundreds of little brands. um and I don't think because Tristel's ah cloud dar chlorine dioxide is
00:54:56
Speaker
is patented. um it ah There aren't other companies using it. um so this it it is It is apparently the best. um so um yeah i think so yeah I think this is maybe more of a story stock than ah then I would like. I, as a as a ah member of Stockopedia,
00:55:24
Speaker
I think there are reasons to be a little bit wary. The share price trajectory is not good and I think that is something that um being wary of formerly high-flying companies, which Tristel has been, which have come off the boil,
00:55:40
Speaker
is something that I have learned to be far more wary of. Stocks that are going up continue to go up, stocks that are going down continue to go down. And and while the share price hasn't performed very well in 2024, it's still not that cheap. It's P-E ratio is 23. It's trading on 23 times forecast earnings. um Earnings forecasts are pretty much where they were at the start of the year, um having gone up for a little while and then gone come back down again. um So while quality still exceptionally high, very high margins, very high returns, very good cash generation, the trends in the share price are maybe a little bit a little bit troubling. But yeah, so I would say this is maybe a little bit more of a story stock than then I would like, but um maybe a story that's going to be a good one in 2025.
00:56:34
Speaker
I'm assuming that ah yeah you'd be looking for some good news from the states as ah as a bit more of a buy signal. The problem is that good news from the states, at once there is good news from the states, you'll have missed out on some gains. ah ah but maybe Maybe the answer is yeah, wait for some good news from the states first and then and that em then get in.
00:56:56
Speaker
um Yeah, not 100% sure, but I like it. It's a good company, like for high margins. I'm just looking at the yeah at the stock port um at the stock report. It's one of those situations which we we do warn against um at Stockopedia.
00:57:15
Speaker
But when individual investors think that they they know the entry point, like you can't can't guess the entry point, but I'm sort of trying to convince myself that I found it right here and now on the 20th of December.
00:57:31
Speaker
um But that's not the way to invest. That's silly. Of course. Graham, shall we come to your final pick for your watch list?
Trustpilot's Valuation Concerns
00:57:45
Speaker
ah Yeah, sure. um So ah I just wanted to mention TrustPilot. This has been on my ah um my watch list for two years in a row. um In the first year, I believe it generated a return of them over 50%. And ah so far in 2024, it has produced a return of over 100%.
00:58:14
Speaker
um And so the time the time has come to ah to decide if Trustpilot has ah as overheated. and This company, I think probably everyone listening, almost everyone will be familiar with it, um provides a review service.
00:58:39
Speaker
and it sells ah so you know ah subscriptions to businesses to basically help them manage their trust pilot review. and and The reason I find this company so interesting is that I think it has the potential to be a monopoly because There aren't, as far as I can tell, any ah meaningful competitors to Trustpilot. Google Reviews is sort of a competitor, but but um Alphabet or Google
00:59:23
Speaker
hasn't really invested much in that service, as far as I can tell, in Google Reviews. And pretty much anything can and does get a review on Google. And I don't think that there's much work done on the reviews themselves in terms of finding fake reviews, for example.
00:59:46
Speaker
and so When companies promote themselves to customers, may not just in the UK, but in many other countries, ah they often cite their trust pilot rating. So I think it's a it's an interesting story. I was intrigued by it initially when I noticed that they were ah making a transition into profitability.
01:00:17
Speaker
ah So to give you a number say, and in the most recent half year report, they produced an adjusted EBITDA of 10.6 million pounds over the six months can and a very small operating profit. However, the market cap is now 1.3 billion pounds.
01:00:43
Speaker
and In terms of um dollars, it's $1.6 billion. dollars and so Actually, they um they do report in dollars.
01:00:57
Speaker
ah so um I think it may now be overheated. and I said the last time I covered it on Sokopedia's daily report that if the price to sales multiple got to 10 times, then I would have to do something. i Maybe I would not be able to stay positive on it at that point. and The price to sales multiple is now about eight times. ah So it's been a remarkable return.
01:01:31
Speaker
ah The company has been buying back its own shares. I'm a little bit concerned actually that it has continued to buy back its own shares at this level. and I mean, I guess from the company's point of view, the ah you know i paying out dividends at this stage may seem like a waste of time because the dividend yield would be very low and people who own TrustPilot probably aren't in it for the yield.
01:02:00
Speaker
but at the same time buying back your own shares at this level, ah I'm not sure if they're really getting any value now at this stage. So this is a bit of a teaser. I guess you'll have to read the article and see what replaced Trustpilot on my watch list. Absolutely, which will be we'll try and link that in the episode description.
01:02:24
Speaker
um I had a couple of questions. You mentioned it's you think it's basically but has the potential to become a monopoly. um Monopolies obviously tend to be characterized by sort of wide, deep moats, I think. um Why are trust pilots margins so low? And do you think and how would it go about expanding those? Well, ah good question, Lawrence. But I don't I don't think it's I don't think its margins are low in the sense that
01:02:55
Speaker
it and It's basically an online business, a software business or a website, wherever you want to describe it. and It's really just needed to grow a little bit more to cross over into profitability and future revenue growth should generate, you know should drop down to the bottom bottom line to a large extent. and In terms of where it gets its pricing power and you know why do people pay it? and
01:03:30
Speaker
I think there's ah there there is a lot of concern out there perhaps um that the ratings are possibly a little bit unfair on people who don't sign up for the service. and That's a view that's out there that you know if you don't pay TrustPilot, then you know you'll end up with more bad reviews than if you do pay TrustPilot. So that that is a concern that but some businesses have and maybe some businesses feel it's a bit unfair that they have to pay TrustPilot to basically get more good reviews. TrustPilot would have a ah different opinion, of course, and you know that's not how they would describe what they're doing.
01:04:17
Speaker
and But the fact that there's so little competition out there, means that I think a lot of businesses do reluctantly feel obliged to ah to sign up and the network effects will continue to grow because ah you know they've got ah 67 million unique monthly users, 300 million reviews on the platform. It's ah it's kind of bigger than than anything else out there. And and if Trustpilot is where you go to verify that a business is good, that just means that everybody has to get onto it. The network gets bigger.
01:05:02
Speaker
And it becomes more and more difficult for anyone to compete with it. So I think it has the potential to be a very large business in the future. and But I think I may need to take it off my watch list now at a price to sales multiple of eight times and maybe put it back on some other year. You mentioned, obviously, the main competitor of very few competitors is Alphabet with Google Reviews.
01:05:30
Speaker
ah what do you think the potential is of Google either in which you basically choosing to invest in its Google reviews and sort of try and eat back some of the ah some of that or just buying Trustpilot outright? I mean this is very difficult to predict and because Google would have to really make a very conscious decision to invest in Google Reviews. They would have to create a logo that everybody recognized. That would be a rival to Trustpilot's logo. That would be instantly recognizable. And and they would need to get it into you know dealing with businesses. you know If they wanted to really charge businesses for Google Reviews, make some money out of it,
01:06:23
Speaker
And there'd be a lot of investment required. um I mean, of course they could afford to do it, but it would be a whole other strategic direction. it would take years for it to pay off like you know because it's taken Trustpilot years for their investments to pay off. I don't know if they have the appetite to do that, and but it's a risk, I suppose, that you you take with a lot of businesses. you know People will say Amazon's going to compete or Google's going to compete. like it I suppose it's always there that a giant could try to muscle in. and But as there is so much recognition for the Trustpilot brand already,
01:07:02
Speaker
ah I think it would make some sense for Google just to buy Trustpilot, although then I suppose they'd have to decide what to do with the brand. So short answer, Lawrence, I've no idea, but I guess we'll see. Megan, it sounds like your kind of company, frankly, high-growth tech.
01:07:20
Speaker
Yeah, yeah i it's ah interesting, Graham, you say that it's maybe time for this one to come off your watch list. ah Just turning to profitability, just starting to look more like a high quality operator. Maybe it's when a company like this starts ah starts ticking some more boxes for me. But I just can i can't over the fact that they're buying back shares. this that That seems like an odd decision. um Surely if there is a market to be conquered and they've got all this cash, invest in it um rather than boost up the share price. I ah don't love that as a ah as a strategy. um
01:08:04
Speaker
i I can see, though, that there is, I mean, I can't think of any other review companies other than Google, as you say. They occasionally get emails, we use Trustpilot at work, and I occasionally get emails from people purporting to be competitors or sort of alternatives to Trustpilot. But Again, like the Trustpilot brand is so strong and sticky that I'm quite busy anyway, but I just never give them the time of day. I never even look past the email. Yeah. Yeah, absolutely. And so I think that is a, ah that obviously then feeds the network effect as, as you were saying, Graham, but companies like this that have taken a fairly, a fairly long time to be profitable also ring slight alarm bells for me. Like why has it?
01:08:56
Speaker
Why is it only achieving operating margins of but it's just under 2% in 2020? The financial year just gone, which I assume was the year financial year to December 23. And so, yeah, I assume those operating margins are now higher. but Um, yeah, it just, I feel like it's taken slightly too long to become profitable and to share buyback things. So yeah, Graham, I'm with you. Um, actually in, uh, as an all round conclusion, I think maybe, maybe the,
01:09:32
Speaker
ah the growth has so might teaact taper out a little bit. As the company settles into a slightly different type of investment, I guess, um it's been a ah fast growing um um fast wearinging on the revenue level and it's obviously not going to be able to maintain quite such a pace of revenue growth. And as it yeah settles into a different style of investment, it might start appealing to a different nature of investor. but isn't quite high enough quality yet for for those.
Conclusion and Next Episode Teaser
01:10:04
Speaker
And on that note, we've had a bit of a bumper episode, a little bit longer than our normal ones. ah So I think we're going to wrap that up there. I hope you've enjoyed that. and If you are a subscriber to Stockipedia, you will be able to access ah the full watch list on the platform. and If you are not yet a subscriber, you can head to stockipedia.com and you can and enjoy our free trial.
01:10:27
Speaker
and enjoy all the content, all the insights, all the tools available on the platform free for two weeks. um Thank you very much for listening. If you've not done so already, love it if you would go and leave us a rating on your podcast platform of choice. And if you know of anyone who you think would benefit from listening to this, that please share the episode with them. ah Thank you very much, Megan. Thank you, Graham. and you Thank you.
01:10:53
Speaker
And happy new year, everyone. We will be back next week, same time, same day ah to run through the first full week of headlines for 2025 back in our normal format. So we'll see you then.