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Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Anthony Cross, fund manager at Liontrust.
I am not convinced there will be a 'V'-shaped recovery. We should see an earnings bounce due to cost cutting and a pick-up in activity after the near economic collapse last year. But this does not guarantee continued strong earnings recovery thereafter. For that we will need a sustained pick up in demand. But with government spending cuts, over-indebted consumers and high unemployment, it is hard to see where this rise in demand will come from. That makes it difficult to justify the valuations of many cyclical companies.
I would invest in companies whose earnings are robust and whose valuations are not dependent on a sharp economic upswing. My dream company has intellectual property (IP), a powerful distribution network and delivers high recurring income. These intangible assets make a company particularly hard to copy and mean it can sustain high levels of profitability throughout the economic cycle.
Finding such companies is tough. Many have one or two of these powerful intangible assets, but rarely all three. The four companies I have chosen are therefore quite exceptional. They are all technology companies with IP in software and accumulated development spending. They have each built a strong distribution network and have high recurring income. This is achieved through annual licence fees as opposed to the once traditional software business model of a large initial licence fee and then smaller future annual maintenance and support fees.
The stocks Anthony Cross likes
| Craneware | 348p | 208.5p | 345p |
| Fidessa | 1,298p | 450p | 1,067p |
| NCC | 420p | 265p | 387p |
| Statpro | 99.5p | 34.5p | 98.5p |
Craneware (LSE: CRW) provides software to the US healthcare market. It enables hospitals to estimate treatment costs and manage the billing process for insurance claims. This market is growing fast, but as yet only around 50% of the 5,700 hospitals in the US have such sophisticated systems. Craneware achieves 90% renewal rates on its multi-year contracts.
Fidessa's (LSE: FDSA) software provides brokers and fund managers with data connections, trading, information and pricing tools. It is benefiting from the growth drivers of compliance, regulation and the fragmentation of markets. It has slowly built market share and its award-winning software and service has allowed it to compete with much larger rivals. Over 80% of its revenue is recurring and much of its data are embedded in customer systems.
NCC (LSE: NCC) is the world's largest provider of software escrow. This is a type of insurance for users of software. NCC takes a copy of the software from the software vendor and stores this in two separate locations. In the event that the software is no longer available, the end customer has back-up software. NCC has to forge agreements with both software vendors and customers and achieves renewal rates of more than 85%. The group also carries out testing of networks, websites and systems for companies. It is the largest independent tester and achieves high annual renewal rates.
Statpro (LSE: SOG) provides performance and attribution software for fund management firms. It has 90% recurring income and its data are increasingly embedded in client reporting systems. It is also developing a growing electronic distribution network via its new software.
