Just occasionally a book, or an interview gives me a little more insight into my preferred investing method namely Growth/QM. So it is with the interview with the Growth fund CEO Paul Black of WCM Investment with $200B of assets under management. It is a fascinating discussion which includes the desirability of Moat company culture aligning with its competitive advantage.
Almost as an aside Paul mentions that he particularly likes Moat companies where other companies R and D is sub-contracted to them. Paul believes that these type of outsourcing companies warrant a much higher valuation. I can think of 2 such UK companies; both of which I hold and have done particularly well for me. These R and D specialists are the monoclonal antibody developer Bioventix (LON:BVXP) and the vehicle testing company Ab Dynamics (LON:ABDP).
Can anyone add any more UK R and D outsourcers to this list?
Interview: http://capitalallocatorspodcast.com/2018/05/06/paulblack
I have Bioventix (LON:BVXP) and Ab Dynamics (LON:ABDP) too but have not really though of them in that way before. It is an interesting thought, though I’m not sure why this type of business would be particularly desirable - did this Paul Black chap say what he liked about them other than valuation? I would be wary of customer concentration risk for this sort of business e.g. if the customer decides to go in-house. More generally I would probably find more vertically integrated businesses that did their own R&D and controlled their own supply/distribution chain as more desirable. Most of the time you would have thought this would be more strategically resilient and efficient.
Strictly speaking I don’t know of many other businesses you would describe as R&D outsourcers. I guess you could think of some enterprise software businesses in a similar way, in which case I have a few of these businesses on my shortlist: Craneware (LON:CRW) Microgen (LON:MCGN) Sopheon (LON:SPE) (probably the nearest to an R&D outsourcer) Playtech (LON:PTEC) is another similar sort of business but I’m not such a fan of it these days...
