When a successful fund manager like Nick Train buys something, it’s probably worth paying attention. This is particularly the case when it’s a top-tier growth stock that’s fallen 10% in value in the last year.
As someone who tries to adopt a similar strategy to this heavy hitter, I’m asking whether I should follow his lead.
On the ropes
Train’s new holding, which he began building in September (but has only recently confirmed), is property portal Rightmove (LSE: RMV).
Split across two of the funds he manages, this strikes me as a really interesting buy given what happened only a month ago.
Back in mid-October, it was announced that US property giant CoStar would be buying Rightmove’s competitor OnTheMarket. Now, the latter is far smaller than the FTSE 100 juggernaut. However, it’s clearly CoStar’s intention to challenge for top spot in the UK.
Worryingly for Rightmove, CoStar has the financial clout to at least try. It can outspend on marketing and drop charges in an effort to steal clients.
Going cheap
Despite this headwind, I can see why taking a stake in this stock might appeal to Train, given his penchant for buying high-quality companies.
Rightmove’s operating margins are regularly over 70%. That’s staggeringly high. As might be expected, given its relative lack of capital expenditure, and the company generates lots of free cash flow and boasts a very robust balance sheet.
This brings me to the price tag. On Friday (24 November), Rightmove shares were trading at just under 21 times earnings.
At first glance that looks expensive, at least relative to the UK market as a whole. However, I still think this premium is justified, considering the hallmarks mentioned just now and despite the battle that (probably) lies ahead.
What’s more, that valuation is far below the five-year average of 32 times earnings.
Recovery is not a given
For balance, it’s always important to consider the flip-side to any bullish perspective.
Train is investing with the belief that Rightmove can hang on to its crown. Obviously, this can never be guaranteed. All sorts of companies have dominated specific market spaces and went on to lose their way and never recovered.
This is why I’d always check that my portfolio is sufficiently diversified away from anything with links to the UK housing market before considering buying here.
I’m sure Train would agree this is prudent. While he does run very concentrated portfolios, he makes a point of spreading his investors’ cash around several sectors.
As I type, my only property-related holding is in housebuilder Persimmon. The possibility of an interest rate cut next year means I’m loathe to sell this to make way for a stake in Rightmove.
But it’s still important for me to recognise that I might be taking on more risk from owning both stocks.
My verdict
Taking the above into account, I’m considering adding Rightmove when cash becomes available. Without dismissing the threat, I suspect CoStar – like all other overseas companies that have tried and failed to date — won’t find it easy to break the company’s near-monopoly.
Like recent falls in premium spirit seller Diageo and luxury firm Burberry, I regard this as the sort of opportunity to snap up a quality stock that rarely goes on sale.
