June of 2015 was a special time.<\/p>\n
The vastly underrated Jurassic World was about to become the first film to make US$500m worldwide on its opening weekend and in Harare, President Robert Mugabe had just discarded the national currency in favour of the greenback \u2013 35 quadrillion Zimbabwean dollars for one USD seemed pretty reasonable.<\/p>\n
Over on the ASX, the benchmark was heading for it\u2019s first full year loss since 2011.<\/p>\n
While in the shadows of the local IT Sector shares in a hitherto obscure small cap Objective Corp (ASX:OCL)<\/strong><\/a> \u2014 a much under-recognised compounding machine that provides software to government and enterprise customers \u2014 hit $2 per share.<\/p>\n According to Andrew Page from Strawman.com<\/a>, it was a record high which followed \u201ca staggering rally\u201d from just 20 cents a few years earlier.<\/p>\n \u201cThis \u2018ten-bagger\u2019 was certainly assisted by improving revenue and gross profits, both of which had grown 25% over the previous few years \u2013 but a closer look at the journey of OCL from rags to riches provides a more than useful peek into the mechanics of great, stonking growth.\u201d<\/p>\n For OCL \u2013 Pagey says \u2013 it was a simple market \u2018re-rate\u2019 that did the heavy lifting: the average annual P\/E ratio grew from 11 to 30 between 2012 and 2015.<\/p>\n \u201cThe market \u2018re-rate\u2019 basically pushed the stock price higher. Higher shares mean a higher PE ratio. So in the lingo you say it was \u2018re-rated\u2019. It\u2019s a bit of a markets term.<\/p>\n \u201cSo for example,\u00a0 if a stock goes from a price of $10-$15 (and pushes the PE from, say, 20 to 30) it has been \u2018re-rated\u2019 by the market. The market rates it differently, thinking shares are now worth 30x per share earnings, whereas before it felt they were worth on 20x per share earnings.\u201d<\/p>\n \u201cThat\u2019s not to take away anything from those who invested back then \u2014 a P\/E of 11 was ludicrous for a business that was generating increasing levels of free cash flow while still investing heavily into R&D and aggressively buying back shares.\u201d<\/p>\n Andrew says that value can sit in plain sight for ages \u2013 long before the wider market finally cottons on, especially for small caps that more easily fly under the radar.<\/p>\n \u201cWith shares today sitting north of $12 each, anyone who invested in the company at $2\/share in 2015 has been clearly vindicated. Not only have shareholders scored a compound annual capital gain of roughly 30%pa, but dividends would have repaid a quarter of your purchase price.<\/p>\n \u201cIt looks easy in hindsight, though it was anything but. Consider the following, which tends to be true for most long-term compounders.\u201d<\/p>\n It\u2019s not easy for value-focused investors to buy shares that have already increased 10x in very short order, especially where the market multiple sits significantly above the average, Andrew says,<\/p>\n \u201cAfter buying at $2, you\u2019d have seen shares drop as much as 30% lower and spend almost two years underwater.<\/p>\n \u201cWhen shares did eventually start to push higher again, the temptation to take profits would have been incredibly difficult to resist.<\/p>\n \u201cIn 2021, you could have cashed out at $10 and pocketed a 5x return \u2014 and with the P\/E then at 50x it would have seemed more than justified.\u201d<\/p>\n Pagey says that throughout the journey, OCL shares experienced multiple pull-backs of more than 20%, and are presently down 40% from the 2021 high.<\/p>\n \u201cThe gains for Objective Corp shareholders may be eye-watering, but they have been hard fought.\u201d<\/p>\n \u201cWhile such examples are the exception to the rule, they are perhaps more common than you might think \u2014 ProMedicus (ASX:PME)<\/strong><\/a>, PolyNovo (ASX:PNV)<\/strong><\/a>, Nanosonics (ASX:NAN)<\/strong><\/a>, Audinate (ASX:AD8)<\/strong><\/a>, Altium (ASX:ALU)<\/strong><\/a> are just a few that spring to mind.<\/p>\n \u201cAll the above names \u2013 virtual king-makers that went from relative small-cap obscurity to industry leaders valued at hundreds of millions (and in some cases billions) of dollars with lots of potential for further growth.\u201d<\/p>\n \u201cWhile we can always lament having missed out on monster multi-year returns (if indeed you did, there\u2019s more than a few Strawman members who caught plenty of the upside), there should be great solace in knowing that many eventual 10-baggers are likely sitting right under our noses.\u201d<\/p>\n And here\u2019s where the story of Objective Corp and its peers can be instructive, according to Andrew.<\/p>\n \u201cAll of these companies had successfully commercialised products and were generating growing sales. Several were already profitable.<\/p>\n \u201cInvestors who bought years ago weren\u2019t speculating just on pure blue-sky potential\u2026. No. Share prices a decade ago seem insanely cheap from today\u2019s vantage point, but were actually at or near record highs at the time.\u201d<\/p>\n Pagey says that it was the market itself which was behind the crystal ball.<\/p>\n \u201cThe market and its participants were often very slow to react to demonstrated business progress\u2026 Painful and protracted drawdowns were common.<\/p>\n \u201cEven accounting for the explosive revenue growth in these companies, share prices often ran ahead of what was reasonable. Of course, the extent and duration that the market overshot things was impossible to predict.\u201d<\/p>\n \u201cAll of these companies had (and continue to have) a big focus on R&D and a capacity to reinvest earnings at high rates of return\u2026 All would often fall short of analyst forecasts, and most had to suffer through various and not-insignificant business setbacks.\u201d<\/p>\n The bottom line, he says,\u00a0 is that these opportunities are never obvious, they take years to play out.<\/p>\n \u201cAnd they give rise to many a sleepless night.\u201d<\/p>\n \u201cWhich is why, if you hope to catch a baby giant, you need to do your research, build conviction, practice extreme patience, and react with equanimity to (often extreme) price volatility.<\/p>\n Easier said than done, Mr Page warns\u2026 \u201cbut well worth the effort.\u201d<\/p>\n \u00a0<\/p>\n The views, information, or opinions expressed in the interviews in this article are solely those of the interviewee and do not represent the views of Stockhead.<\/em><\/strong><\/p>\n Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.<\/em><\/strong><\/p>\n <\/span><\/p>\n The post Lessons on the ASX journey from dirt bag to Ten Bag<\/a> appeared first on Stockhead<\/a>.<\/p>","protected":false},"excerpt":{"rendered":"Re-rate this<\/h2>\n
Buy the rise<\/h2>\n
Obscurity to fecundity<\/h2>\n
Objectivity<\/h2>\n