July Stock Purchase – ABF, PZC, SGE

The month of July saw the market continue its relentless march upwards. It seems that not even the threat of a trade war has been enough to dislodge the current market trajectory. Many analysts point towards the strong global economy for the positive market backdrop currently being experienced.

At present multinational companies are seeing better growth return in many emerging markets, whilst industrial production markets and other more economically sensitive sectors are enjoying notably more buoyant conditions than those that prevailed a couple of years ago. This has caused the stock market to remain buoyant.

Whilst the market as whole is at the top end of the valuation spectrum, a number of individual shares pulled back from their highs and offered investors the opportunity to buy into them at reasonable levels. This is a huge advantage we individual investors have over the professional money managers – we are able to sit patiently and wait for a pullback in order to deploy our cash at attractive prices.

In the month of July, I thought the following shares were attractively priced and made the following purchases:

  • Associated British Foods – I bought 10 shares at £24.31 each
  • Sage – I bought 93 shares at £6.17 each
  • PZ Cussons – I bought 69 shares at £2.24 each.

I will focus on sage which I managed to sink over £500 at what I feel are very appealing levels.

I have mentioned before that the best way for individuals to outperform professionals is by increasing our time horizons or holding periods. Instead of buying into a stock and thinking about the next few months, we should have our eyes firmly fixated on the next few years. We should be able to see past any short sighted problems and focus on the long term performance of a business. Most professionals are not able to do this as they are judged on a quarter by quarter basis. This is why many professionals will not touch businesses that are undergoing a temporary transformation.

I believe Sage falls into the category of being an excellent investment for anyone with a long time horizon.

Sage is currently facing technological challenges in migrating its business to the cloud. This has seen the company’s share price fall 20% this year. However, the results a few months ago where reassuring. They demonstrated Sage’s continued dominant position in the provision of enterprise software to small and medium sized businesses. This market is structurally attractive and is growing at approximately +7% per annum.

So whilst the company clearly has challenges, it is important to focus on the longer term and assess whether the company will provide handsome returns for its shareholders. I for one think this will betel case.

I believe Sage to be an excellent company which has the capability to power through any period of challenge it faces. As mentioned, the company is the industry leader in its field and target market. The company has been through an investment phase over recent years, both centralising its business under one core technology platform, and accelerating its investment in new technologies to ensure this competitive position is retained.

78% of the company’s revenue is recurring and as an increasing number of customers migrate to cloud subscriptions, the company expects recurring revenue to move towards 90% of sales, providing a very resilient bedrock of cash flow. This revenue visibility is invaluable to investors and will see the company trade at higher multiples.

On a forward basis, Sage trades on a Free Cash Flow Yield of 6% and a dividend yield of 2.8%. When comparing these figures to those of other enterprise software companies around the globe, Sage certainly looks cheap. So for those of us with long-time horizons, now is an opportune time to buy. Who knows how long the company will stay at current valuation levels.

Monthly Stock List

As mentioned in my last monthly stock purchase post, I had a reader recently write to me asking if I would tell him in advance the stocks I will be buying via my monthly stock purchase programme. He said he would be willing to pay for this service. He thought this may be a useful extension to the website. I am willing to try this out provided I have sufficient numbers. If you are interested, please write to me via the contact form or contact me on moneygroweruk@hotmail.com

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