Terry Smith and Nick Train are two of the UK’s best money managers. Since Smith launched his Fundsmith Equity fund in late 2010, he’s turned every £10k of investor money into more than £50k. Meanwhile, Train’s UK Equity fund has generated more than three times the return of the FTSE All-Share index since its launch in 2006.
Here, I’m going to highlight a FTSE 100 stock that is held in both the Fundsmith Equity and the Lindsell Train UK Equity fund. This stock is a little out of favour right now and I think it’s a great time to be buying for the long term.
A top FTSE 100 stock
Sage (LSE: SGE) is a leading UK technology company that helps businesses manage their finances and their people. Its key offering, Sage Business Cloud, is a cloud-based accounting and payroll platform aimed at small- and medium-sized companies, as well as the self-employed. Currently, Sage serves around three million customers in 26 countries. However, it believes its total addressable market is nearly 70m businesses.
Terry Smith and Nick Train love this company
It’s not hard to see why both Smith and Train are fans of Sage. This FTSE 100 company appears to have all the right ingredients to be a winning long-term investment.
Firstly, it operates in a growing industry. According to Fortune Business Insights, the market for cloud-based accounting solutions is forecast to grow at 8% per year between now and 2025. This industry growth should provide tailwinds for the company.
Secondly, it’s one of the leading companies in its industry. It does have some competition from rivals such as Intuit and Xero. However, its products are generally regarded as high-quality. And it’s worth pointing out that once a business selects Sage’s platform, it’s unlikely to move to a competitor due to the hassle of switching.
Third, the company’s financials are impressive. Over the long term, Sage has delivered an impressive level of revenue and profit growth. Meanwhile, Sage’s level of profitability is relatively high. Over the last five years, return on capital employed (ROCE) has averaged 16.6%. Additionally, the company has a strong balance sheet, with only a small amount of debt.
Overall, it’s very much a high-quality stock.
Share price fall
Sage’s most recent full-year results, posted in November, were relatively solid, given the economic environment. For the year ended 30 September 2020, organic total revenue was up 4% while underlying earnings per share were down just 1.6%. The dividend was increased by 2%.
However, since these results, the FTSE 100 stock has underperformed. One reason the share price has declined is that the company said that it plans to invest more in research and development. This investment will hit near-term profits.
Personally, I think this share price weakness has created an attractive buying opportunity for long-term investors like myself. Sage has said that looking beyond FY21, it expects profit margins to trend upwards over time, as the investment drives recurring revenue growth and operating efficiencies. So, I think patient investors should be rewarded.
I’d buy this FTSE 100 stock now
Sage shares currently trade on a forward-looking P/E ratio of about 24 and sport a dividend yield of just over 3%. For a company of Sage’s ilk, I think these metrics are very reasonable. I see this FTSE 100 stock as a ‘buy’ right now.
