Damon Ficklin, Co-Head of Team, Portfolio Manager & Analyst recently joined Money Life with Chuck Jaffe to discuss applying the Polen investment philosophy to global markets and the prospects he sees in today’s pandemic environment. Read the podcast interview highlights below and learn more about the Polen Global Growth strategy.
Q: Can you explain your methodology and the Polen Global Growth strategy?
A: Polen Capital has been around for quite a while. What we work to do is invest in concentrated portfolios of the highest quality of companies with a long-term focus. So it’s really about businesses versus stocks for us.
We’ve executed this methodology for more than 30 years. I was the co-manager on the Focus Growth strategy, our flagship U.S. product for many years, and then moved over to lead the global strategy in 2017. So, I’m very excited to be able to execute our time-tested discipline without boundaries or borders.
Q: When you are looking at businesses in this pandemic environment, are you seeing a lot of good businesses on sale? Or, does this period make it tougher to value a business and see its potential?
A: We’re definitely in a very interesting environment to say the least. I think concentration is a big advantage, in the sense that we really are looking for 20 or 30 of the best businesses in the world. So, that gives you the opportunity to really pick your spots.
Even in a strange world where businesses are seeing notable impacts from this unusual environment, there’s some businesses that really aren’t affected much at all. Some actually may see an acceleration in their business as a result of this environment.
We haven’t made many changes to the portfolio, but we’ve been a little more active than average over the past six months. We’ve re-evaluated any risks that might have emerged from the current environment and also seized a few new opportunities.
Q: What would be the things that meet your investment criteria today?
A: We have low turnover, a five-year average holding period. We do not have a lot of new ideas in any given year, but, this year, we’ve added three new holdings to the Global Growth strategy—LVMH or Louis Vuitton Moët and Hennessy, PayPal and Autodesk.
Louis Vuitton is the leading luxury brand in the world, and it has tremendous assets and a very long-term focus. Bernard Arnault owns nearly half of the company today and thinks not in quarters or years, but really in decades, and we think in that direction as well.
This business will likely be impacted in the current environment because it sells much of its product through brick-and-mortar stores. Still, we believe it has the durability and endurance to be an outstanding business and return to solid growth when things return to normal. This environment has really given us an opportunity to buy that quality asset at a much more attractive valuation.
Q: Can you discuss why PayPal is good fit for the Global Growth strategy?
A: We’ve actually been studying PayPal for quite a while, and we have pretty significant positions in Visa and MasterCard that we’ve had for many years. We feel we know the payment space well, and this is one of those businesses where I think the unusual environment is serving as an accelerant.
One of the biggest challenges with PayPal, historically, is getting users on their platform and having them engaged with their solutions. Often PayPal finds that if a customer uses its payments solutions, for example three times within the first ten days of engaging with PayPal, they frequently become lifelong users. But the adoption curve for PayPal’s products is slow depending on the age demographic. While younger millennials and younger people are already using these products regularly, what PayPal calls “silver tech,” the senior citizen demographic, is not or was not as familiar with this technology.
In the current pandemic environment, however, everyone is forced to try these new tools because people are less inclined to physically handle cash, especially if they can accomplish a transaction digitally. This appears to be driving adoption and repeat use. We are seeing that happen more today than we’ve seen in a very, very long time.
The business is not cheap, at a little more than 40X forward earnings, but we think it has a great growth profile, and we think it is accelerating.
Q: What makes Autodesk an attractive investment?
A: Autodesk is essentially a software-as-a-service business. If you go back several years, it was selling packaged software mainly to architectural engineering design firms, and that is still its focus today. It had the leading product in a computer-aided design, and now it has expanded into computer aided architecture with building information modeling (BIM) technology. The software is required to go from idea to final construction of a building.
It has also moved to a subscription-type model. Today, most of its revenues are recurring. The end markets it serves are somewhat economically sensitive, as you would imagine, but its business model is not that sensitive, in our view. As we entered a very unusual environment in March, we were able to buy Autodesk for just a little over 20X forward free cashflow. We thought this was a steal for a company that we believe has 20% plus growth opportunity for the long term.
Q: What makes you sell? And, what is something you moved away from recently?
A: There’s a few reasons that we would sell. One would be if we felt there was a new risk that emerged. What we’re looking for, essentially, is what we think are the most competitively advantaged, durable businesses in the world, bar none. That really rests upon some type of competitive advantage or differentiation. If we feel that the competitive advantage is deteriorating or being challenged in any real way, we’re pretty quick to get out of the way. That is not common, but it is an important reason to sell.
Other reasons that we would sell would be driven by valuation. We are willing to pay a higher price for a higher growth company. But ultimately, if that price gets too stretched and we are not confident we are going to get a double-digit investment return going forward, then that becomes a trigger to sell.
Finally, we are constantly trying to find better ideas and opportunities, even better than the ones we have. So, when we do find those opportunities, that displaces some of our holdings.
For example, the only company we sold in the March timeframe was O’Reilly Automotive. It is predominantly a U.S. company, with small operations in Mexico, selling aftermarket auto parts to both do-it-yourself and do-it-for-me customers. It is an incredibly stable business, in our opinion, but it is one of the few businesses that had a little more debt than we’re usually comfortable with.
We entered an environment that was quite unusual where there was going to be pressure on earnings growth and on their business, just in general, as a function of people not driving. We thought there was a little more risk with O’Reilly than we cared to hold.
One other example is Coloplast. We own the Denmark-based business and it is the leader in ostomy and continence care products. We believe it is an incredibly stable busines. In fact, it’s seen almost no change to its growth as a result of this environment. That has led to a quality premium if you will—the stock had risen above 40X earnings. We said, “We love the business, but that’s a pretty rich multiple for the growth profile.” So we’ve trimmed that position back.
Q: Some audience members wanted to know your views on Amazon.com.
A: Frankly, in the Polen Global Growth strategy, we found what we think is an even more attractive analog and that’s Alibaba—it is essentially the Amazon of China. Without going into too many details, the margins are stronger, the market position even stronger, and it is very aligned with the Chinese government’s interest. It is the backbone of China e-commerce. So, we think Amazon is a great business, but the valuation is more stretched. Whereas, to us, Alibaba is much more attractive. So, Amazon is a great business, but we would not own it at this point.
Q: Can you talk about your views on Netflix?
A: We think Netflix is also a very interesting business, but I would be hesitant to own it because it does not meet our investment criteria. Netflix is just recently breaking through to be free cash flow positive. The reason for that is because it is very expensive to create content. They have a real advantage in that they have a diverse library of exclusive content, are globally scaled, and have 150 million subscribers, which makes them the leader. This is a very attractive business, but it is a capital-intensive business. Until we see more free cash flow and higher returns on invested capital, it is not something that meets our investment criteria.
The information provided in these materials should not be construed as a recommendation to purchase or sell any particular security. There is no assurance that any securities discussed herein will remain in the portfolio at the time you receive these materials or that the securities sold have not been repurchased. The securities discussed do not represent the entire portfolio. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable or that any investment recommendations we make in the future will equal the investment performance of the securities discussed herein. Past performance is not indicative of future results.