HealthInvest Partners’ investment philosophy is squarely focused on value. We prefer to invest in companies which make money, have a low valuation, employ a business model which is easy to grasp, and are market leaders in their segment. Here we have listed seven points which describe where and how we go about finding attractive shares.
Investor interest in small caps is significantly less than in larger companies. While a drug giant such as GlaxoSmithKline is followed by over 30 analysts and hundreds of professional investors, there are a great many smaller listed companies which are subject to minimal analytical coverage and in which trading is dominated by private investors. As fund managers with a particular focus, we often create an informational advantage relative to the majority of the private investors who follow the shares of small companies and we can exploit this advantage in the form of successful investments.
LOWER RISK ASSOCIATED WITH LOW-VALUED COMPANIES
We prefer so-called value stocks which are either valued at a low multiple relative to the cash flow they generate, to its growth, or have a large cash balance or other divestible assets which are not reflected in the share price. Cheaper shares are not always successful investments but, all things being equal, the downside (that is to say, the risk associated with the share) is lower in a share which has a low value.
WE PREFER COMPANIES WHICH ARE EASY TO GRASP
We want to be able to condense our view of the success of the share on just one or a few parameters. For example, this may involve an existing launch of a drug which is decisive to the value of the share the development of which we can follow by the number of prescriptions and also talk to doctors about the drug in question. For this reason as well we are rarely comfortable investing in developing companies with pending clinical experiments as their only asset. We believe quite simply that there is too much uncertainty involved in foreseeing whether the clinical trials will succeed or fail.
WE LIKE COMPANIES THAT EARN MONEY
The healthcare sector has plenty of unprofitable companies with ambitious visions but little tangible value. We leave these companies to other investors. We focus on companies with well-tested business models, that already have products on the market, and generate persistent and positive cash flows.
WE THINK LONG TERM
We try to look beyond the next couple of quarterly reports and into subsequent years. Frequently, a position must be acquired before other investors are drawn to the share and cause the price to rise.
WE LIKE MARKET LEADERS
Market leaders frequently enjoy a range of advantages which create obstacles for their competitors – this is particularly clear in healthcare. A market leader has cost advantages in product development, distribution and marketing which make it difficult for competitors to break in. In addition, a market leader already has an established customer base, and confident, satisfied customers who are prepared to pay a relatively high price.
WE TRY TO KEEP AN OPEN MIND
The way we see it, successful investments are not about purchasing shares in the best companies in the most exciting industries. It is about buying at a good price. A company which seemed hopelessly over-valued a year or two ago may be an attractive investment today. Similarly, an apparently unexciting industry may hold the best investments. The best investment we have made for HealthInvest was in an American company which ran a fleet of ambulances – it was not the most exciting industry in the world, but the share increased ten-fold within a couple of years.