Gear4music And Focusrite - Two Online Stocks Beating The Market

7th May '20 by Jack Brumby

9 comments 3057 reads

Gear4music Holdings (LON:G4M) and Focusrite (LON:TUNE) both provide music products and software online. Both also score well in terms of quality and momentum (G4M with a QM Rank of 87, TUNE with 98), and both also have their own founders still as top shareholders (see G4M here and TUNE here)

That is where a lot of the similarities end, however. Dig a little deeper and we have two quite different businesses in terms of established quality and profitability.

I last wrote about G4M on the 6th of April and noted that its prospects might be improving. Since then, shares are up by about 42.5% to 288p. In fact, its shares have nearly doubled since March 18th. The company has struggled to make profits in the past but some are clearly anticipating this will change. It is “cheap”, with a price to sales ratio of less than 0.5x.

Focusrite, on the other hand, has been very profitable for many years now. It has been a great success for shareholders. It has a superlative track record of high returns on capital and free cash flow. It is “expensive”, with a price to sales ratio of nearly 4x.

Both companies, I think, are quite well placed to navigate these conditions. Staying at home for so long may or may not permanently change habits, but I think it will almost certainly nudge established long term trends further along. One of the big trends of the past decade has been the shift to online retailing.

So will these two companies continue to be winners long after lockdown?

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Edit: on an unrelated note, I see BOTB has once again surprised the market. It’s an interesting company. Paul is covering today’s news here and I covered it a couple of weeks ago here if you want to take a closer look.

Gear4Music

Market cap: £59.7m

QM Rank: 87

1y relative strength: +90.6%

What does it do?

Gear4music sells own-brand and third-party musical instruments products in the UK, Europe and the Rest of the World.

The group has struggled to prove the profitability of its business model though. This led management to introduce a raft of operational changes recently. The change in tack appears to be winning some people over.

A subsequent share price rally makes G4M a…

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Michael Taylor

7th May '20

Enjoyed this article Jack. G4M is on my radar and one I want to see start moving upwards before I start buying.

"The fact is, even after nearly doubling over the past month, G4M shares trade at well below one times sales - an attractive entry point if you believe this online retailer is proving its model and stands to gain from long term trends towards online retailing."

For me, it's about whether the market believes this online retailer is proving its model and stands to gain from long term trends towards online retailing!

Wilbraham

Useful article, though I'd welcome more comments on future prospects post-CV19. To my mind the businesses operate in quite different market segments. I'm nervous about TUNE - live events are surely dead for some time at least in the UK (I accept their market is worldwide, so Europe and USA may pick up sooner) and it's hard to see recording studios being that active in a physical-distancing regime and being prepared to upgrade their hardware. I have a friend whose brother runs a respected recording studio in London so I may get some comments on general activity.

One attractive feature of TUNE is that the advfn board is quiet as a dormouse - almost 3 months since the last post!

wildshot

8th May '20

Thanks for another great article Jack, I always look forward to reading them when I see you are the author.

I've followed the G4M story for a few years without dipping my toe. TUNE more recently came on my radar when I saw it was in Keith Ashworth-Lord's Buffetology fund. For me TUNE sounds like a better and more solid prospect on what I know so far (which is not much).

Please pardon my ignorance but it has baffled me for years. Why is there so much focus on price to sales? Isn't sales vanity and profit sanity? Lower your margin enough and you can increase your sales but what if you struggle to cover costs? I just don't get it. Give me a company making good margin every day of the week.

CamRaid

9th May '20

I find it strange nobody is talking about Naked Wines (LON:WINE)

Zoiberg

10th May '20

Gear4music Holdings (LON:G4M) If my local were open I would go and ask the bar staff who are mostly recruited from a local music college. The phrase that sticks in my mind is "highly competitive market".

Jack Brumby

11th May '20

Hi wildshot,

Thanks, that's great to hear! Good question re. price to sales. I've wondered the same thing in the past.

P/S is handy in terms of making loss-making companies more comparable with others. Obviously, you would be hoping that company is only temporarily loss-making... Sales are also less easy to manipulate than earnings.

There is actually some pretty solid research that backs up price to sales as a good valuation metric to look at though - it's been a while since I read it, but James O'Shaughnessy finds it to be one of the best measures you can look at in What Works on Wall Street.

If you head over to the (O'Shaughnessy-inspired) Tiny Titans momentum screen, you'll see it has performed very well over the years despite mainly relying on just price to sales and relative strength.

That's a good point CamRaid, I'll add it to my list. Quite an obvious one now you've mentioned it! Do you hold?

Yes I do hold. One of the real interesting points prior to C19 was the position built by Punchcard Capital. C19 has merely acted as a catalyst to accelerate what they wanted to roll out in the US. There is huge opportunity for them in the US.

12th May '20

It may also be worth adding that Punchcard Capital have now taken a stake in Motorpoint (LON:MOTR)

Gear4music and Focusrite - two online stocks beating the market

Gear4Music

What does it do?

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Jack Brumby

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