Trust in quality

Many years ago, I read a story by Marcus Padley praising the virtues of a one-stock investment portfolio.

The philosophy behind the idea is that when all your money sits in one stock, you will make sure you know every in and out about this company and you'll know when to take some money off the table and when to buy additional exposure.

The concept also makes sure you concentrate all your efforts in the right place. There's only one company to follow, query, research and analyse. Anyone can do this.

It's an appealing concept, assuming you choose the right company, which is always straightforward when we allow Harry Hindsight to have his say.

In my personal case, I might have chosen TechnologyOne (ASX: TNE) whose growth trajectory since 2004 is nothing short of 'stunning'.

Consider the share price back then was less than $1 and this week the price has exceeded $30. I am not even going to put a mathematical appreciation on this.

Year-to-date the shares have rallied more than 100%.

You wonder why I would ever buy an index ETF or try my hardest trading in and out of stocks whose momentum comes and goes.

But, of course, I could also have chosen CSL (ASX: CSL) which until the early COVID-panic of 2020 had been an equally stunning investment for many years, but a whole lot less so since.

I would have built up a lot of frustration had I put all my money into CSL, there's no denying it.

The underlying philosophy behind the one-stock portfolio does appeal though and the longer I analyse and comment on financial markets, and run my own Portfolio, the more I gravitate towards the core philosophy as expressed by investment legend Peter Lynch: Know what you own, and why you own it.

Truly achieving that, to be frank about it, is a whole lot easier to do when you concentrate your efforts around a selected basket of companies you get to know intimately as you own a large part of the targeted selection over a prolonged period.

This is essentially the framework I have created for myself and for those investors who pay attention to my specific research into All-Weather Stocks.

I like the idea of getting on board the TechOne shareholder register when only a few others are paying attention and still praising the company's quality and achievements many years later when just about everyone is starting to pay attention because the return has been absolutely phenomenal.

I am still not in a mood to sell and that confidence is built upon the multiple experiences and insights accumulated over that long period of ownership.

Having said so, one should never fall for hubris and fail to understand the importance of pure plain investor's luck. I might have been confidently singing the praises of TechOne for many years now, but there's a big difference between being confident and knowing exactly how the future will play out.

I never knew the share price would double this year. I did not know TechOne's new product would be such a big hit so soon or that the UK expansion would beat all expectations. I also still remember 2016-2017 and 2020 when nobody seemed much interested and the share price didn't move much a la CSL today.

But I remained confident I should remain on board TechOne's register, regardless of what the market mood was during those times.

Combining all of the above and the logical improvement upon the one-stock investment thesis is to build a concentrated portfolio of selected companies you get to know well.

In my case, I seek to identify the highest quality sustainable growers, the kind of companies like TechOne and CSL that are most likely to generate lots of shareholder value, over time, not necessarily right here, right now or all the time.

The market's mood swings are not necessarily straightforward or even "important", plus bad things can and do happen to great companies, occasionally, but that only sets them back temporarily.

The investment thesis for CSL is continued margin improvement on the back of strong growth in plasma collection and related products, which form the basis and the bulk of the company. Vaccines and Vifor should start contributing positively again.

In TechOne's case, it is the qualitative transformation of a business that is now truly blossoming and readying itself for an acceleration in the pace of growth on top of cash flows arriving in spades.

The board has just amended its dividend policy in line with the improving outlook, while additional shares for employees will no longer dilute shareholders.

Two decades ago, TechOne shares were valued on P/E multiples in the mid-teens. Today, the PE multiple on next year's forecast EPS is a meaty 72x (60x on the FY26 forecast). And yet, plenty of expert voices will tell us this does not by default prevent the share price from climbing further in 2025.

To understand the importance of last month's financial result, investors should know market consensus was positioned for the company to outperform on its own FY24 guidance.

As it turned out, financial forecasts were beaten on just about every single metric that counts for this type of business, even including temporary headwinds that make the underlying performance and operational momentum even more magnificent.

In simple parlance, this company that promised for years it would grow between 10%-15% per annum, and delivered on it, had upgraded itself for growth between 12%-16%, but is now likely to grow by around 20%, with ongoing upside surprise potential, including from acquisitions.

That, in a nutshell, is the valuation transformation that has taken place and which places TechOne in contention for the coveted title of Highest Quality Growth Company on the ASX, alongside the likes of Pro Medicus (ASX: PME), REA Group (ASX: REA), Aristocrat Leisure (ASX: ALL), Goodman Group (ASX: GMG), and WiseTech Global (ASX: WTC) -- the founder's behaviour excluded.

All these outstanding ASX-listed achievers share some basic similarities, including consistent spending on R&D from a market leadership position.

These companies also make a mockery out of investors' obsession with trying to find ten-baggers among cheaply priced alternatives.

The share market's seldom highlighted secret is the highest and most consistent, sustainable returns have come from these highly priced, High quality achievers -- for the past 15 years.

Given the AI megatrend will transform businesses and economies in the years forthcoming, the number one task ahead for investors might well be to figure out how this separates winners from losers, and how not to be deterred by the higher valuations for the first group and not to be suckered in by the lagging share prices for the latter.

One of the added advantages of running a multi-stock portfolio is you can allow some inclusions to lag and underperform. It's quite unnatural for all stocks to rally at the same time and in the same magnitude. Plus all of today's winners have been out of fashion at some stage over the past 15 years.

Among this year's underperformers, we also find Dicker Data (ASX: DDR), IDP Education (ASX: IEL) and Woolworths Group (ASX: WOW). While the reasons for IDP Education and Woolworths have been well-documented, we look forward to better times ahead. As far as Dicker Data is concerned, we honestly have no idea.

Does the market know something we yet have to find out about? Let's hope not, but we are willing to take that risk.

In some cases, the risks don't add up or are too high to bear. The FNArena-Vested Equities All Weather Model Portfolio sold out of Audinate Group (ASX: AD8) and Steadfast Group (ASX: SDF) earlier this year. In both cases, the risk profile had deteriorated.

One of the bonuses of running a multi-stock portfolio is that mistakes made or unexpected disappointments don't necessarily destroy the year's performance.

FNArena offers truly independent, impartial, ahead-of-the-curve share market analysis and commentary, on top of proprietary tools and data, for self-researching and self-managing investors. The service can be trialled here.