Top fund manager Neil Woodford has recently pumped cash into stock market newcomer Hostelworld (LSE: HSW), and ramped up his stakes in FTSE 250 firms BTG (LSE: BTG) and Allied Minds (LSE: ALM).
Woodford’s confidence seems like a good reason to take a closer look at these three companies.
Hostelworld
Hostelworld is the world’s leading online booking platform for hostels and other types of budget accommodation. The company’s shares were admitted to trading as recently as 2 November.
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Hostelworld raised £125m at 185p a share, and had a market capitalisation of £177m on admission. Woodford took 13.5 million shares in the IPO, making him Hostelworld’s biggest new shareholder with a 14.1% stake in the company.
Hostelworld sits in the mainstream CF Woodford Equity Income Fund. The latest fund update tells us: “We are attracted to its strong market position, strong cash generation and growth prospects.”
Hostelworld is a good fit for an equity income fund, as the directors are aiming to pay an annual dividend of 70%-80% of the company’s adjusted profit after tax. If you want to follow Woodford into this one, you’ll have to pay a rather higher 207.5p a share today.
BTG
BTG has been around for many years. The company has gone from being a commercialiser of intellectual property into a healthcare business with high-margin specialist products.
BTG’s shares fell heavily in early October when a half-year trading update disappointed the market. This was largely due to slower progress than expected on a varicose veins treatment. However, Woodford — who holds BTG in his growth-focused Woodford Patient Capital Trust, as well as his core equity income fund — continues to see considerable future potential in the treatment:
“Given this, its other on-market products and an interesting pipeline of future opportunities, we continue to view BTG as a compelling long-term growth story. We added to the position during the month.”
At a share price of 595p — again, somewhat higher than Woodford paid — BTG trades on 33x forecast earnings for the company’s current financial year (ending 31 March 2016), falling to 23.5x the following year. The 40% year-on-year earnings growth gives an attractive price to earnings growth ratio of 0.54.
Allied Minds
Allied Minds is developing technology businesses using its unparalleled access to the best intellectual property coming out of US universities. It’s comparable to IP Group and Imperial Innovations — both also Woodford holdings — which are doing a similar thing in the UK.
Damning reports on targetted companies by short-selling hedge funds claiming accounting fiddles or outright fraud have become a feature of the modern investing world (for example, Gotham City Research’s attack on Quindell as a swindle and Quintessential Capital Management’s exposure of Globo as a fraud).
In September, word got around that New York-based hedge fund Kerrisdale Capital was planning an attack on Allied Minds. As it turned out, Kerrisdale’s report contained no sensational allegations of wrongdoing by the company, but was scathing in its assessment of the valuation of the stock:
“Allied Minds is a true triumph of mind over matter, style over substance — a dressed-up collection of high-risk, low-reward gambles that we believe has at least 70% downside.”
Woodford and his team were unruffled by the Kerrisdale report:
“Although this has been unsettling for market sentiment in recent days, we see nothing fundamental to concern us. Indeed, our confidence has increased in both the long-term potential of its existing portfolio of maturing technology businesses and in the management team’s ability to identify new value-creating opportunities from its relationships with the best research institutions in the US”.
During the course of October, Woodford — who holds Allied Minds in both his funds — ramped up his interest from around 50 million shares to over 60 million, giving him a 28% stake in the company.
The shares are trading at about 450p today, having recovered somewhat from the shorting attack, but remain well down from their peak of over 725p reached in the spring of this year. Allied Minds, which is currently loss-making, is hard to value, but Woodford clearly sees a bright future for the group.
