figuring out which companies would lead out of the bear market. He assumed that
investors who had lost money to technology stocks would seek out companies that
looked different. He reasoned that risk-averse investors would return to valuation firstprinciples,
wanting to own firms already generating cash with strong balance sheets.
There ought to be some companies he could buy and squirrel away for the market
recovery. Maybe even technology businesses that had been sold indiscriminately
because of their association with an unloved sector.
Browne began screening for companies with a good business model, plenty of
growth potential and plenty of money already on the balance sheet. An out-of-favour
technology company was exactly what was thrown up by the screening process.
Wanadoo is a French Internet Service Provider that is the gateway to the
internet for millions of computer users across Europe. It appeared to be making a lot
of money and yet had suffered in the bear market. The growth potential was apparent,
the company was rolling out a broadband service and had over 8 million users of its
internet connection. Browne decided he should pay the company a visit to confirm
that the business model looked as good on the inside as it appeared from the outside.
What he saw was a business that fulfilled his valuation requirements. It came with
the added benefit of a much improved valuation proposition, having been a casualty
of the tech fall-out. That put the current stock price well below what he thought the
company was worth: ‘It was unloved not because of how it operates but just because
it was an ISP.’ Browne bought at 6.5 euros and has seen his holding double in value.
Good investment ideas are too precious to be squandered. Browne realised that
if Wanadoo fitted the profile there might be other European ISPs that were also
generating good cash flow. He also bought shares in T-Online, Germany’s largest ISP
and a unit of the country’s telecom giant, Deutsche Telekom. Both companies were
starting to capitalise on a new business opportunity he thought would be extremely
lucrative. While carrying out research work on the telecom sector he had noticed
rising levels of broadband use among home computer users. An army of armchair
internet browsers fed up with slow connection speeds were prepared to pay extra
for faster downloads. The ISPs were in the prime position of already serving those
customers. They could therefore offer a premium broadband service at a premium
price with few start-up costs. This was all good news for company profit margins, and
Browne’s stock positions.
Another company that has made Browne’s long book is Anglo Irish Bank.
The Dublin headquartered company is listed on both the Irish and London
stock exchanges; it’s a niche business bank more interested in lending to other companies
than chasing the retail consumer market.
Small companies can struggle with financing. They are too small to tap the equity
market, they are often misunderstood by the high street retail banks, and private
equity money often demands an ownership stake. Browne had an idea at the start of
2003 that he should examine the players lending money to small companies. Banks
that understood small companies and their desire to borrow in a low interest rate
environment ought to be thriving. Browne says that Anglo Irish just leapt out of the
screen: ‘it had a 30% return on equity, an established management team and the
lending book looked to be of good quality.’
The early research work looked promising. Browne next sought out information
on any future plans the bank might have for raising cash. There are few things that
frustrate a fund manager more than buying a company’s stock only to see their holding
diluted by further shares being put into the market. There was nothing to indicate that
Anglo Irish intended to raise cash by issuing more shares to existing shareholders.
In fact Browne’s research highlighted the management team’s desire to develop the
business organically. Browne bought the company’s stock at the start of 2003 and has
watched the price double. ‘This was the right company with the right balance sheet
in the right segment of the market at the right time.’
Read More : Trading Long
