Games Workshop has been one of the darlings of the FTSE over the past decade. In an era when the UK market has fallen out of favour with international investors, the manufacturer of fantasy table-top games has gone from strength to strength, rising by more than 4,400%.
Performance of stock vs index over 10yrs
Source: FE Analytics
Alpha Manager Keith Ashworth-Lord has been a long-term admirer of the stock, and for good reason – it has been one of the main contributors to performance in his CFP Sanford Deland UK Buffettology fund, which is in number one position in the IA UK All Companies sector since its launch in March 2011.
To help explain Games Workshop’s remarkable success, he described it as one of a small number of listed companies that “owns a piece of the customer’s mind”.
“The people who play that would spend their last dime on it,” he said. “They would find a way to play it if they were 100ft underground.”
While many analysts have said the future remains bright for Games Workshop, some investors may baulk at buying in now, wary they are late to the party.
However, Adrian Brass of the Majedie US Equity fund said he may have discovered the US version of Games Workshop – and what’s more, he pointed out it is hidden within another business that is currently out of favour with the market.
Performance of Hasbro (share price only) over 5yrs
Source: Yahoo Finance
“Hasbro the toy company has a business called Wizards of the Coast which accounts for nearly half of its profits,” he explained.
“It is growing really quickly, has high margins, and we think that it is not understood yet: it's a hidden gem and in time it can really release value.”
Like Games Workshop, Wizards of the Coast publishes games primarily based on fantasy and science fiction themes. Its most recognisable brand is probably Dungeons & Dragons, although Brass was more interested in Magic: The Gathering, a card game with more than 35 million players.
“The people who play it live in this fantasy world that they have spent years developing,” Brass continued.
“And every few months, a new release of cards comes out and they will rush out to buy it.
“It's a similar type of dynamic as Games Workshop, it's the kind of thing where people who play it just fall in love with it and they'll spend a decent chunk of their leisure spend on it.
“More importantly, it's a very high margin business. And what's nice is it's becoming increasingly digital, which is a new revenue stream.
“In the same way Games Workshop has been going through a renaissance and growing quickly, this thing has too.”
ICv2, which covers “geek culture” for retailers, noted Wizards of the Coast had an operating profit margin of 46% last year. Revenues for the division increased 24%, compared with an 8% fall in Hasbro’s overall figure.
The hidden gem stock, “where there's a beautiful asset getting bigger and bigger within a parent business,” is currently one of the four main themes in Brass’s portfolio. He is also interested in bounce-back opportunities, where businesses have fully recovered from the pandemic, although their share prices remained depressed; and transformation stories, where a focus on the macro has meant important changes at the company level have gone overlooked.
The final theme is the least exciting, but perhaps the most important – what the manager referred to as “mediocre growth” companies.
He noted that although the S&P’s earnings growth has been “sensationally high” in the past 18 months, this has been driven by either the “hyper growth” stocks such as the tech mega caps, which benefited during the early part of the pandemic, or the “hyper cyclicals” which surged in the rebound.
“That has left the stocks that are in the middle, which are really good-quality companies but offer mediocre growth,” Brass said.
“A lot of them look boring by comparison. This is anything from Intercontinental Exchange, the leading exchange, through to Electronic Arts, the online gaming company, and Frontdoor, [a building sub-contractor].
“These are examples of businesses that are growing nicely and were very defensive through Covid, but they just didn't offer the jazz that the big recovery names were offering, so they got left behind.
“As growth normalises for the economy and the market, we think that those kinds of names will start to get more respect.”
The obvious question to put to a US manager is ‘why not just invest in a tracker?’, seeing as how most active investors underperform the S&P 500.
Brass replied that the market as a whole looked expensive, with valuations on certain pockets so high they have left him “scratching his head”.
He warned you couldn’t even argue that this is down to the bounce-back from the pandemic, with this momentum now running out.
“Earnings growth has looked sensational over the past period because you were recovering from a very depressed economy – even for the last quarter, earnings growth was above 40% for the S&P,” the manager added.
“By the end of the year, you're going to be back down to single digits.
“But at the same time, what is incredibly exciting is there are substantial pockets of really attractive valuations: these are stocks that are cheap versus their history and they're cheap versus the market.
“It’s a very strange feeling at the moment: I don't like the market, but I love many of the opportunity sets we see.”
Data from FE Analytics shows Majedie US Equity has made 209.5% since launch in June 2014, compared with gains of 211.1% from the S&P 500 and 187.6% from the IA North America sector.
Performance of fund vs sector and index since launch
Source: FE Analytics
The $357m fund has ongoing charges of 0.89%.