Strategy: Greg Hoffman

If genius is 1% inspiration and 99% perspiration, as the great inventor Thomas Edison suggested, sharemarket research requires the same effort

Several years ago I met a friend in Sydney’s historic Rocks area at the door of Ansarada. I hadn’t heard of the company at the time but, as he emerged, I was intrigued by the quick glimpse I got inside. The offices were beautifully designed, which is not unusual at the big end of a glittering city like Sydney, but this really stood out and made an impression on me.

My friend mentioned that his company was doing some work with Ansarada and that it was an impressive company. He said it ran “virtual data rooms”, which are typically used during corporate transactions.

When I was part of the sale of Intelligent Investor in 2014, our advisers set up a virtual data room to store key documents. These included financial statements, employment contracts, supplier contracts, documents showing ownership of key intellectual property, leases and the like. Potential buyers were able to access this sensitive information in a controlled manner.

More recently, I was having lunch with Leah Fricke, a professional director who I’ve worked with for many years across two boards. I asked her what her boards of choice would be and she mentioned Ansarada, highlighting the quality of its product and its global growth potential. I made the connection to my visit from a few years earlier, but nothing more.

Idea generation

A few days after that conversation, I was going through the share tables in the newspaper from A to Z. It’s something I do a couple of times a year (and more often in bear markets). To my surprise, I noticed that Ansarada was listed. I hadn’t realised that when Leah Fricke mentioned it. A little light of inspiration went on inside me. I then set to work putting some perspiration into preliminary research.

I came to Ansarada via random experiences and connections that took place over several years. In the finance industry, the chain of events that leads to a potential new investment is referred to as “idea generation”. It’s my favourite part of the investment process.

I find it thrilling to come up with potential investments that might serve to increase the portfolio’s potential returns or reduce its risk for a similar level of expected return. Now let’s contrast the fortunate happenstance that led me to Ansarada as a potential new investment with the ways finance textbooks might recommend investors search for ideas.

“Top down” investors aim to pick over-arching themes or trends that they believe are favourable. They then try to find individual investments that fit with them. Electric vehicles, battery storage, cloud computing (including, dare I say, virtual data rooms) and the opening up of the US to legalised gambling would be examples of this kind of thing at the moment. All are areas that are growing quickly.

Running “screens” is another common method used in the search for new ideas. This involves combining computing power and a large database to find stocks that meet certain criteria. They might be fundamental business qualities (profit margin or growth, or perhaps balance sheet strength) or they may have more to do with valuation (high dividend yield or low price/earnings ratios, for instance). Many online brokers offer some kind of stock screening capability nowadays, but there are also specialist services that you can pay for.

Other avenues to finding new ideas include subscription services, newspapers, magazines, online forums or even social media. Some people comb through reports from respected fund managers looking for inspiration.

Each of those methods has its advantages and disadvantages. Personally, I don’t have a set process and prefer to cast a broad net by injecting a lot of randomness into my search for ideas. I talk to a wide variety of people, read offbeat things that many finance types might find beneath them (like airline magazines or the trade press of various industries) and generally try to keep my mind open to possibilities. Which brings us back to Ansarada.

It turns out that Ansarada slipped onto the ASX via a “backdoor listing” late last year when it merged with a small listed company

called thedocyard. The combined company changed its name to Ansarada in December 2020 and began trading under the code AND.

I found presentations by and interviews with key company personnel online, which began to convince me that the company has effective technology and a significant growth opportunity. I also took a look at Ansarada’s most recently available quarterly report.

It showed the company was cash flow positive in the three months to March 31, which makes a pleasant change from many fast-growing technology businesses. It also showed no debt and a healthy cash balance of more than $20 million.

In summary, the company seems to have good products, a global growth opportunity, a strong balance sheet and is run by owner/ managers. Its valuation, about $100 million as I write, is also modest enough that it could grow to multiples of its current size with relative ease.

The research that led me to those conclusions represented about three hours’ work. And it was enough to convince me to put Ansarada on my list of companies to conduct full research on, where the hardcore perspiration takes place.

From here, I’ll be diving into the prospectus that was released late in 2020 and all of the company’s subsequent ASX releases. To better understand the product, I’ll use my network to track down and interview several clients and search for reviews and reports from others. I’ll also dig around to identify competitors and assess their various strengths and weaknesses in relation to Ansarada’s offering. Then I’ll work to understand the risks involved.

Once I develop a good picture of the industry, Ansarada’s position within it and a better view of the company’s risks and growth potential, I’ll move on to valuation. Necessarily, this won’t be based on traditional measures like historical dividend yield or price/earnings ratios. Such approaches almost never work with young, fast-growing companies.

Assessing the upside

My valuation approach will be heavily futurefocused. I’ll form a range of views around what Ansarada’s business and financials might look like in five or 10 years. From there, if the upside seems large enough and likely enough, I’ll set it in the context of today’s price.

For instance, if I determine that the stock might be worth $2 per share in five years, I’ll compare that to today’s share price and the dividends I expect over that period to work out a rough expected return. If that return compensates me adequately for the risks involved, then I’ll consider the risks in the context of my other investments. If the risks don’t overlap with too many of my other holdings, I’ll look to establish a holding.

All of this might take me the better part of a week and is at the top of my to-do list after posting this column. Extensive research is my second favourite part of the investment process, so it’ll be a fun week.

Greg Hoffman is an independent financial educator, commentator and investor. Find him on Twitter via @GregHoffman15.

I prefer to cast a broad net by injecting a lot of randomness into my search for ideas