Stock in Focus: The UK’s greatest small-cap

In 2014 I graduated from The University of Bath having written a dissertation entitled The effect of exercise on human dendritic cell movement. A decade on and I cannot fully remember the significance of that research - I am sure I am not the first person to forget the intricacies of their degree once they enter the world of work. But I do know that in order to complete my research, I needed to monitor the flow of the dendritic cells (which are part of the immune system) in blood samples taken at various intervals while the participants were running. And in order to do that, I needed antibodies.

Antibodies are used throughout the scientific community because they latch onto unique cells, making it easy to identify those cells in a blood or tissue sample. They’re needed in drug development to identify candidates for cures and therapies, they’re used in diagnostics to identify foreign molecules which can cause disease and, as was the case with my dissertation, they’re used in research. And throughout the world, wherever you find antibodies being used for science, you’ll probably find Abcam.

Makings of a multi-bagger

Abcam was founded in 1998 by a group of researchers at Cambridge University who sought easy access to high quality antibodies. It was a time when successful businesses were beginning to sell their products via the internet and so Jonathan Milner, David Cleevely and Tony Kouzarides built an online database to source and sell the best research antibodies alongside reliable data.

In the early days, the founders were storing their antibodies in ice buckets and selling them mostly in the laboratories of Cambridge. But by 2005 - the year the company floated on Aim - sales had risen to £12m, almost double the previous year. More importantly, pre-tax profits were just shy of £3m, giving the still fledgling company a mighty impressive profit margin of 24.5%.

But Abcam’s IPO at 167p was still treated with some scepticism. City analysts didn’t understand the product or its potential in the market and the share price languished under its placing price for its first few years on Aim.

But at its heart Abcam was (and remains) a very simple business. Put aside the fact that the individual products (antibodies) are not widely understood outside of the scientific community and this is simply an online catalogue business which makes it easy for customers to source the products that they need. What makes Abcam special is its powerful database, which compiles research and knowledge about the antibodies to be sold, thus improving the experience for customers and ensuring they make the best purchasing decisions.

This database provided Abcam with phenomenally high barriers to entry. By the time competitors had clocked the potential for selling antibodies online, Abcam’s database was already impossible to replicate. More orders meant more data and more data meant better service, which meant more custom. This positive feedback loop meant that by 2010, five years after the IPO, Abcam’s sales and pre-tax profits had risen to £71m and £26m respectively - a compound annual growth rate of 43% and 54%.

With Jonathan Milner still at the helm (and retaining a sizeable stake in the business), Abcam reinvested large chunks of cash into research and development and operational improvements. In 2010, the company’s return on capital employed (a measure of the proportion of profits generated from working capital) was 46% - meaning that for every £1 invested, the company made an additional 46p in profits.

By 2014 (when I used Abcam’s products for my own research) and 2016 (when I started covering the company’s investment credentials) all scepticism for the potential of the business had evaporated. Ten years after the IPO, Abcam’s share price had four-bagged. Three years after that it had ten-bagged and become Aim’s biggest company. The Aim-listed shares hit an all time high of 1750p in late 2021. The only time it let its investors down was when it delisted in June 2022 in favour of higher liquidity on Nasdaq. London’s junior market is poorer for its absence.

Lessons from Abcam’s success

When I first started writing about direct equity investing, I spent a lot of time scouring the healthcare and tech sectors looking for the another Abcam. My search was not in vain. Bioventix (which also manufacturers antibodies, for use in diagnostics machines) has been a similar flying success.

But the truth is that the hunt for stocks that have the potential to deliver multi-bagger returns should not be confined to the high-flying healthcare and tech sectors - where companies promise world-changing innovation and investors are prone to jumping on the bandwagon for fear of missing out. Indeed, some of the UK’s best performing companies have come from the retail space (Asos and more recently Games Workshop) or hospitality (Greggs and Domino’s Pizza). And then there are those which appear pretty ordinary, providing goods and services to something as basic as the construction industry (Renew and James Latham).

None of these stocks thrived because they created products or services with the potential to change they world. They succeeded because they created a simple product/service and delivered it exceptionally well, by building a business model which hurled off cash that was reinvested back into further growth.

There have been many Abcams on the UK’s markets over the years and there will be many more. Pin-pointing the traits of these major success stories can help us identify the multi-baggers of the future.