During our recent National Roadshow (a video of which can be viewed here), we discussed how Montaka’s portfolios are positioned to take advantage of observations we are making with respect to global economic drivers that affect your equity returns.
We discussed a business called Insperity (NYSE: NSP). Now, Insperity has been around for about 30 years though is not particularly well-known amongst the investor community. Inpserity is essentially a “professional employer organization” which means it acts as the co-employer of the staff of leading small and medium sized businesses across the US. Insperity manages certain human resource-related processes such as payroll, compliance and health insurance on behalf of its clients. And in return, Insperity will take a cut of the staff’s wages.
Now, we observed that wage growth has been accelerating in the US over recent years. Indeed, it was for this very reason that the Federal Reserve increased interest rates in December for the first time since 2006. Given that Insperity’s revenues are a function of employer wages, it will be one of the few businesses to benefit from this structural trend. As wage growth accelerates, so too should Insperity’s gross income.
The thesis is certainly playing out – and more. Insperity delivered a terrific set of first quarter results in recent days which illustrates the strong execution of the management team in retaining existing clients and adding new clients. Gross income per employee is growing while costs are being well-contained. All of this led to growth in EBIT (earnings before interest and tax) of nearly 60 percent year-on-year! The stock rallied accordingly.
So how did we identify Insperity as an opportunity? Readers that follow us closely will know that we generate ideas via a two-input process. The first input relates to ideas that are organically generated by our research team through the daily research and analysis of active and new portfolio equities, industries of interest and global media content.
The second input relates to ideas that are generated by our quantitative tool that implements a proprietary fundamental model on the filtered universe of global equities that meet size, liquidity and stock exchange criteria.
Our proprietary quantitative tool leverages computing power to rapidly evaluate sourced financial data (from Bloomberg) by calculating a series of metrics for each company. These metrics primarily fall in the category of quality and value. The tool provides us with an unbiased assessment of the most prospective investment opportunities.
Insperity is an example that was very much a product of our proprietary quantitative tool. We did not know about the business until our quantitative tool flagged it to us as a potential opportunity. Our initial investigation suggested the business appeared promising, especially in light of the current wage environment in the US.
As illustrated by our process chart below, Insperity was then analysed in detail to assess its business quality, future prospects and assessment of intrinsic value. At Insperity’s stock price at the time we started looking at the business (in the low $40s), we calculated that the market was expecting just five percent growth in gross income. We thought this was way too conservative and believed the stock was materially undervalued. We appear to be right: in the first quarter of this year, Insperity’s gross income increased by 16% year-on-year. As expectations are being revised up, so too is Insperity’s stock price.
We have a logical process that is followed with discipline. Our process is both scalable and repeatable. While stock prices are volatile and unpredictable in the short term, our process is not. By following our process religiously, we believe we will deliver superior returns to our investors over the medium and long term.
Montaka owns shares in Insperity.
Andrew Macken is a Portfolio Manager with Montgomery Global Investment Management. To learn more about Montaka, please call +612 7202 0100.
