Podcast - Andrew Mitchell on the Rules of Investing “The market always wins”

Andrew Mitchell on the Rules of Investing Podcast – “The market always wins”

Last month Ophir Co-Founder Andrew Mitchell was invited on the Rules of Investing podcast by Livewire Markets where he was interviewed by Livewire’s Founder James Marley. (Duration 51 mins)

Click here to access the podcast: https://www.livewiremarkets.com/wires/andrew-mitchell-the-market-always-wins

The key highlights are:

Macro environment

1. Tariff risks have been priced out by the market, but should they? The recent market rebound has occurred virtually solely through multiple expansion and not higher market earnings, despite higher bond yields. The TACO trade (Trump Always Chicken’s Out) is alive and well at present with many investors believing we have seen the worst of the tariff news.
2. Pullbacks like we saw in early April after Liberation Day are an opportunity as the market always wins in the long term. The market is also betting on Trump not going down the “Armageddon” path which is helping calm investors’ nerves…
3. We think growth orientated companies become the rare diamond ahead. There is likely lower growth in the U.S. in the second half of 2025 and therefore companies that can grow, like the ones Ophir deliberately targets, are likely to become rarer and command higher valuations by investors. Cyclical businesses might not benefit from the rising tide lifting all boats.
4. During company blackout in early April we were talking to private company contacts. They were saying it was a scary time. We were preparing for pulling of guidance/downgrades of guidance at U.S. company Q1 results, given in late April/May. We were cautious/pessimistic. Trump backed down on tariffs though and it has taken out some of the “left tail” risk of markets. During this market surge since mid-April we have been trimming some of our most momentum driven company names as these will be the ones investors will go after if the market pulls back again.

Global versus Australian small cap investing

5. U.S. small caps can be a more volatile market in comparison. In 2022 and 2023 when rates ripped higher, for some U.S. companies’ valuations there was not anyone to catch you during the sell off. Long only funds typically provide a share price floor earlier in Australia helping to limit the downside. This is also the opportunity though in U.S. small caps as valuations can get cheaper as good quality growth companies are not as scarce in the U.S. like they are in Australia. Often Australian companies can get priced to perfection if going overseas through expansion and the market assumes they will win. There are lots of short reports in U.S. where it is par for the course. This is rarer in Australia though. Also, there is often a lot higher short interest in U.S. small caps compared to Australia. This leads to bigger short squeezes, creating more volatility.
6. History says U.S. market concentration in mega cap tech companies won’t last. Amazon Founder Jeff Bezos has this great quote: “your margin is my opportunity”. Big monopolistic companies get attacked by smaller startups over time. There is also regulatory risk: Will Google get broken up? On some measures the U.S. share market is the most concentrated in 100 years and it’s causing U.S. small cap valuations to be the cheapest to large caps in a generation. We think this will be a big tailwind for U.S. small cap relative returns over the next 5-10 years.

Great management teams in Australia

7. The Lieutenants (and Swimmers) become the Generals. We backed Bill Beament at Northern Star, the gold miner, many years ago and he transformed Northern Star into a behemoth. In commodity companies we think management teams are even more important than in industrials. We have gone on to back Bill at his new venture Develop Global (ASX: DVP) and also one of his star Lieutenants at Northern Star, Luke Creagh who has gone on to lead Ora Banda (ASX:OBM). Another great business leader we like who is a household name is Grant Hackett. After starting at the Olympics in swimming, he now leads Generation Development Group (ASX:GDG). It, through its businesses Lonsec and Evidentia, is the leading player in Australia in the managed accounts space, developing investment portfolios for financial advisors and high net worth investors. Grant is a great example of a highly driven leader who we like to back.
8. Being profitable is not the be-all and end-all. We like management teams who, if they are acquiring customers really cheaply, to keep reinvesting for growth. Like with Afterpay, this means you might not be profitable overall though. We’d rather this though than the company go ex-growth just to be profitable. Good management teams know this. Afterpay could have been profitable if it didn’t seek to grow overseas and spend marketing and capex dollars there and just focus on Australia, but it wouldn’t have been anywhere near as big.
9. Always do your work on the second level of management teams. Great CEOs attract great people. If the second layer of management looks mediocre then this could be a warning sign.

Two stocks we like in Australia

10. The next “rule of 40” stock in Australia? Aussie financial services software business Bravura (ASX:BVS) recently had its CEO resign, which is not normally a good sign. However, the business is going through a transformation with Pinetree Capital, the Canadian family office behind the highly regarded AUD$100bn+ Constellation Software, building a stake in Bravura and having board influence. Bravura has been shedding excess staff and outsourcing to Poland and India to cut costs and improve margins. Service is improving for its big Australian super fund and UK wealth manager customers and it’s building a pipeline of new business in both regions. We think it can push revenue growth from mid to high single digits into the 10-15% range as it continues to improve its margins into the 20-25% range. This would see it approach a “rule of 40” (revenue growth + profit margin) company, which should see it re-rate from its circa 3-3.5x Enterprise Value/Sales valuation to something closer to 6-7x.
11. One company for 5 years. Andrew was asked which company he would back if the ASX shut down for the next 5 years. That ASX listed company is Life360, the family tracking app. It has 80+ million users worldwide with a very low cost of customer acquisition. It has turned on advertising as a revenue stream last year and is flexing its platform with moves into the Pet business and Aged Care to come. The key risk is Apple’s “Find My” product. But like with Spotify being better than Apple Music, we believe Life360 can see off this challenge. It has the added benefit of being across both Android and iOS platforms.