When it comes to finding stocks to buy and hold for the next few decades, I believe you can’t go wrong with Experian (LSE: EXPN). This group is one of a handful of Big Data companies that have a tight grip on the market for sensitive personal data such as credit scores.
Experian uses this data to build products to help other companies make decisions about their customers, for example, whether or not to offer them a credit card or loan. And the fact that it has so much data is its most significant advantage. Indeed, data has become the most sought-after commodity in the world in the 21st century, and it doesn’t look as if this is going to change anytime soon.
The market leader
Experian is a leader in the field because it has such a rich data trove. It has been gathering data on consumers for decades and is one of the most trusted data sources around, which I believe will guarantee its position in the market for decades to come.
Its market-leading position allows Experian to generate fat profit margins (24% average for the past five years) and return on invested capital — a measure of profit for every £1 invested in the business — is just under 20%. That puts it in the top 10% of the market’s most profitable companies.
While the firm’s valuation of 22.9 times forward earnings might look pricey, I believe it’s a price worth paying for a world-leading company throwing off cash for investors. There’s also a dividend yield of 2% on offer.
Data security
As well as Experian, I’m also positive on the outlook for the company’s smaller peer, GB Group (LSE: GBG). These two businesses have plenty in common, as GB is a specialist in identity data intelligence, focused on keeping data secure for its customers.
As the world has become more data dependent, demand for GB’s services has exploded, with sales tripling in just five years. Acquisitions have helped along the way, the latest of which is Vix Verify Global, which GB announced it had acquired today for £21.2m in cash. The deal is part of GB’s ambitions to expand overseas and will give it a foothold in the Australia and New Zealand markets.
Sit on the sidelines?
Data security is a hot topic at the moment, and I reckon GB is one of the best investments around to profit from this theme. However, what I’m concerned about is the stock’s valuation.
Right now, shares in the data security business are trading at a forward P/E of 37 — that’s right at the top end of what I would consider acceptable for any investment. Still, as my colleague Ian Pierce recently noted, GB has high levels of recurring revenue and steadily improving margins, which go some way to justifying the premium price.
Personally, on valuation alone, I would pick Experian over GB right now, although I’ll be keeping a close eye on the latter with a view to buying if its valuation moderates.
