Two extraordinary investing stories

Quality companies can make you rich

I wince whenever I come across the ASOS share price.

You see, ten years ago I bought 37,651 shares in ASOS (LSE: ASC). The trade went well for a few months. So I congratulated myself on my cunning and cashed out for a quick profit. I paid 24p for the shares, and sold them for 70p.

If I can bring myself to check on Bloomberg, I see that ASOS now trades for £67 per share!

ASOS taught me some valuable lessons, a couple of which are particularly relevant for those of us who invest in growth companies. One is that the big companies of tomorrow already exist today. They’re are out there waiting to be discovered.

ASOS wasn’t an obscure, esoteric story that required special knowledge to understand. It operated a website selling clothes that any of us could visit and use.

It’s not terribly hard to find shares which can grow in the short term. What is much harder though, is finding those stocks in the list that can sustain their performance and keep on growing out into the future.

The other lesson is that when you invest in a top quality company for a long period, something extraordinary happens. These special businesses earn high returns on capital and grow without calling on shareholders for extra funds. The miracle of compound returns means that over time their shares reward you with outsized gains.

How I should’ve done it

This leads me to the second share, Next. Next and ASOS have a lot in common. They’re both retail businesses, they both sell clothes, they both trade above £60. But there’s one crucial difference between them: I still own Next shares!

Next is one of my favourite investments. I bought the shares back in 1998 at 470p. I already knew the company very well, having bought it for the pension funds I managed at the time.

In the early 1990s, Next was a classic recovery stock, having nearly gone bust in the recession at the start of the decade. It was saved by the sale of its Grattan mail order business, which rescued the balance sheet.

The turnaround came under the excellent management of CEO David Jones. But what has allowed Next to keep growing and generating great returns in such a mature, competitive sector?

Three reasons for Next’s success

The first has been management’s determination to keep the business focused on the Next brand. Simon Wolfson, who took over from Mr Jones as CEO at the tender age of 33, personifies this.

The brand is sacrosanct. And it has been established as the leader in the mid-market for quality and value. They do the classics very well, but they also design desirable, fashionable clothes.

The second reason is the home shopping service, Next Directory. This really came into its own in 1999 when it became an internet ordering portal as well as a mail order catalogue. The Directory’s early entry into the online world has been hugely important. It gave Next a head start into a vital element of modern retailing – if a company doesn’t have a successful online presence, it’s doomed to underperform.

Next’s internet sales have grown consistently at a double digit rate during a period when its bricks and mortar operation has struggled increase sales per store.

The last point is Next’s highly disciplined approach to capital allocation. It avoided making risky acquisitions. International expansion, usually a graveyard for UK retailers, has been cautious and modest in scale.

Rather than burning a hole in management’s pocket, surplus cash has been returned to shareholders. This has been done mainly through share buybacks where, almost uniquely, Next shows the market the criteria it uses to check whether a buyback creates value.

Until recently Next’s shares were modestly valued, meaning buybacks were a worthwhile use of surplus funds. Over the last few months their criteria for share buybacks haven’t been satisfied. So they have introduced quarterly special dividends instead.

This means that in the absence of buybacks, shareholders might get an extra 200p this year to add to the regular dividend of around 120p. So although the shares have risen by 125% over the last two years, they could still provide a dividend yield of 5.2% over the next twelve months.

Like I said, it’s worth sticking with quality companies. Stick with them, and they can make you rich. And take it from me, selling too early can really hurt.


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  • D.S. Carmarthenshire

    Couldn’t agree more with you, David, re. the online factor. Incidentally I bought a total of 71,750 shares in ASOS in 2003 at prices of 5p and 7p on behalf of my daughter, whose portfolio I was then looking after. Later, I handed the portfolio over to her stockbrokers and the shares were progressively sold at prices from 30p up to 122p. I don’t say I would have kept all of them but would have at least held on to a proportion. She might even have given me financial support in my old age!

  • Crowson

    Very interesting. I dont often hit a share that takes off like that. In my small way, if I am lucky and it moves upwards fast, I sell just enough to get my stake back and then I let it ride. If I get luckier still, I then sell half and then put the rest in the bottom draw for my old age!

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