On Markets & Investing

Monthly Stock Idea Lab (MSIL) #7 - October 2023

As old-time readers of my Newsletter would know, at the end of each month, I summarise the most interesting stock ideas that I come across. A company needs to have more than one of the following five qualities to make it to my list:

  • Great product (unique, hard to replace, offering critical value to customers or just a great brand)
  • Strong business economics (above-average sales growth, profit margins, ROIC)
  • Conservative balance sheet (low leverage, net cash)
  • Alignment of interests between management and other shareholders, preference for family-run businesses and/or companies with significant insider buying
  • Attractive valuation

Once a company appears on the list, it has to pass further thresholds to make it into a portfolio. I ask myself if I understand the business well enough, whether the sector is predictable or prone to rapid changes. There are many other parameters that I look at before making the final decision.

Oftentimes, everything is great about the business apart from valuation, in which case it becomes a matter of time if and when the stock drops to a more attractive level.

There is one exception to this rule in this edition of MSIL (Monthly Stock Idea Lab). Earlier this week, I bought one company from this month's list - Games Workshop. It has rarely been cheap, which always stopped me. But I have been doing more channel checks and just observing how people treat craft-related hobbies. It appears to have strong and long-term engagement, which should help with pricing. I also think there is a much bigger demand for this type of activity. The company's operations are tracking ahead of expectations, and an agreement with Amazon could dramatically expand its customer base.

Let's dive into the five ideas in more detail.

Genus Plc

Ticker: GNS LN
Share price: £21.1
Mkt Cap: £1.39bn
EV: £1.59bn

Genus is a leading animal genetics company. The company helps farmers to produce animals that yield superior quality milk, are disease resistant, with a better balance of protein and fat content, propagate animals with exceptional feed efficiency, and deliver larger litters.

Why it is interesting

The company is about to start commercialisation of a game-changing technology for the pig industry thanks to its gene editing technology. The latter should allow the farmers to produce pigs resistant to Porcine Reproductive and Respiratory Syndrome (PRRS). The costs of this disease are estimated at c. $2bn in the US and EU alone.

On 5 October 2023, Columbia became the first country to approve future sales of PRRS-resistant pigs. Genus expects US FDA approval in H1 ‘24, with further approvals sought in Canada, China, Japan, Mexico, and Brazil.

Brokers’ estimates suggest that this product could almost triple the company’s operating profits from £74.6mn (FY-23) to over £214mn once fully commercialised.

Why now?

Genus’ stock is down over 60% from the 2021 peak and 30% YTD. It was negatively affected by slower progress in the commercialisation of its new products (PRRS-resistant pigs) and falling pork prices in China in the past two years.
The company will host a Capital Markets Event in London on 1 November 2023 to provide additional information on its PRRS-resistant pig development, registration and commercialisation programme.

It is also worth noting that several insiders (particularly the CFO) bought shares earlier this year for under £20 a share.


The company is not cheap even after a 65% share price drop. It is trading at 25x and 21x P/E based on consensus estimates for FY24 and FY25, respectively. It has increased its sales by 7% CAGR over the past ten years, with Europe, the UK and the US being the key markets. Its historical gross margin has been around 35-40%, but the average operating margin was below 10% in 2019-22.

The company has increased its investments to 7% of sales in 2019-22 compared to just 3% in 2012, primarily due to heavy investments in R&D ahead of the commercialisation. As a result, its ROIC has been quite low recently (c. 6% in 2019-22).

If consensus estimates are correct, the full commercialisation should add £140mn to the company's operating profits, reducing Genus' EV/EBIT multiple to 14x.


  • Gene-editing technology is still at an early stage. There have been reports that changes in DNA can lead to future mutations, including in animals. It is likely that the commercialisation of any technology would go slowly and may face further regulatory and social hurdles.

  • Animal breeding is highly competitive, with heavy involvement of the government through regulation of standards, trade tariffs and subsidies. China and the US have well-developed domestic gene editing research capabilities. Hence, Genus will likely face strong competition in the future. It is worth analysing sector competition in more detail before making the final decision.

  • It is possible that if the company’s PRRS-resistant pigs prove successful, then future demand for some of the company’s products will fall since the new breed will perform better. The company may have to increase R&D investments further to find a new product or face a sales decline.

  • Little insider ownership. While some insiders have been recently purchasing shares, there is no strong participation of management in the economic results of the company. It is not an owner-operator type business.


Ticker: 6856 JP
Share price: Yen 7,604
Mkt Cap: Yen 319bn
EV: Yen 249bn

Horiba is a Japanese family business that produces automotive emission measurement systems, environmental measuring instruments, a wide range of scientific analysers, medical diagnostic analysers, and measuring equipment used in the semiconductor industry.

Why it is interesting

The company played a crucial role in uncovering the VW emission scandal. It is currently a global leader in automotive emission testing equipment with an 80% market share and an equally dominant player in mass-flow spectrometers (precision instruments used to measure and control the flow of liquids and gases in the semiconductor manufacturing process). Its market share in the latter segment is 60%.

It strengthened its position in the automotive sector by acquiring UK-based MIRA, a provider of vehicle testing facilities, in 2015. The deal provided Horiba access to the Nuneaton industrial park, where automotive players test technologies, helping the company gain real-time intelligence.

More recently, the company has been adapting to an EV transition. It has started developing unique instruments to gauge EV battery efficiency.

Horiba was founded by Masao Horiba in 1945. His son Atsushi Horiba (75 years old) joined the family business in 1972 as an engineer and has been the company’s CEO since 1992. Mr. Horiba directly owns 2.58% of the company’s shares.

Why now?

There is no specific catalyst that would make the stock particularly attractive today. It is a combination of being a family-run business with market-leading positions in a growing industry, having distinguished R&D capabilities and a strong sales and margin profile.
The company delivered a solid 9% 10Y CAGR. At the same time, the company managed to improve its operational margin to 17% in 2022 vs. 10% in 2012. Given the company’s resilient business model and cash-generative characteristics, its business enjoys a $0.5bn net cash position.


The company is trading at depressed multiples of 7.7x P/E and 5.3x EV/EBIT (last 12 months), although it is almost a norm for Japanese companies to be valued below international peers.


  • It is an R&D-heavy sector with new products and solutions likely to emerge in the future

  • The current demand for measurement products is largely driven by increased focus on climate change. This area, in turn, depends on government regulations and policies, which can change in the future

  • With the rise of EVs, demand for auto emission testing will fall, although this is a very long-term risk

  • Succession. The current CEO is 75 years old

Games Workshop

Ticker: GAW LN
Share price: £98.4
Mkt Cap: £3.2bn
EV: £3.2bn

Games Workshop designs, manufactures and sells high-quality fantasy miniatures and games-related products. The company has two segments: core (95% of 2022 revenue) and licencing (5% of 2022 revenue). The company is the creator of Warhammer and Warhammer 40,000 IPs and owns a license for Lord of the Rings miniatures.

The company started out in the 70s as three games fanatics selling handmade classic wooden games from their homes in London and, later, a chain of general games shops. The business was listed in 1994. The current CEO, Kevin Rountree, took over in 2015, having been the CFO since 2008 and the COO since 2011.

Why it is interesting

The company has a unique product that appeals to thousands of super-loyal fans. It is in a hobby business where customers don't feel that "they are sold stuff" but rather seek experience and co-create. They feel that they own the product. Monetary costs become a secondary issue which strengthens the company's pricing power.

Given its full control of the IP (Warhammer, Warhammer 40,000 and Warhammer Age of Sigmar), the company can constantly update its lore and create new miniatures, thus maintaining the interest of its loyal fan base. As a result, its business enjoys strong pricing power and profitable growth.
The company’s business is about capturing the imagination of miniatures collectors. Customers are ready to pay a relatively expensive price for a high-quality product surrounded by deep lore and stories. As long as the brand name and reputation of the IP are in good hands, loyal fans will be coming back for more.

There are no direct competitors.

GAW has delivered one of the best shareholder returns over the past decade, growing 22x (including dividends).
This may sound anti-analytical, but the company's annual reports stand out from 99% of other UK public companies. It has no photo of a CEO and Board members. It is written in plain language, with no jargon words, minimal comments on ESG (what a relief!), and they don't even use EBITDA (Charlie Munger would be happy). I view this as an important signal of the company's culture, itself a crucial factor for long-term returns for shareholders.

Why now?

In December 2022, Games Workshop announced that it had reached an agreement in principle with Amazon. Under this agreement, Amazon will develop Games Workshop’s intellectual property into film and television productions, and Games Workshop will grant Amazon merchandising rights.

In advance of the actual contracts, Amazon will be commencing certain development activities (e.g. holding preliminary discussions with writers) in order to facilitate the project. GAW plans to initially grant rights to develop the Warhammer 40,000 universe.

The company has not provided further details since suggesting that the final contract has not been finalised yet.

On top of the additional licensing revenue, the Amazon deal could introduce the Warhammer brand to a wider audience and increase its fan base.

In September 2023, GAW released a trading update stating that its performance was ahead of expectations. In the 3 months (to August 27), total revenue grew 14% to £121mn, while licensing revenue doubled to £6mn.

A trailer released last month for the franchise’s cross-platform video game, Warhammer 40,000: Rogue Trader, also revealed the December 7 launch date for the game set for the PC, Mac, Xbox and PlayStation.

Alongside the trading statement, the company declared a 50p a share dividend, taking dividends for the FY-24 to £1.95 so far, compared with £1.20 for the same period last year.

While there is no large insider ownership in the company, it is encouraging to see consistent buying by key executives of the shares.


The company doesn't look cheap on headline multiples. It is trading at about 22x forward P/E. However, the Amazon deal should clearly boost revenue and especially profits, reducing the valuation multiple.

Another point to consider is the strong economics and historical growth rates. The company has delivered c. 18% 10-year revenue CAGR and almost 40% CAGR for operating profit.

The company has been rapidly expanding internationally, generating 78% of sales outside of the UK (in FY-23). The company is still quite small and without any direct competitors operating in a market that it has essentially invented, it is plausible that GAW could continue to grow at a high rate before reaching any critical size.

The company is a cash-rich business distributing all cash-flow not used in the business as dividends (+30% CAGR in the past 8 years). Total dividends declared in FY-23 amounted to £4.15 per share (4.2%).

It runs a net-cash balance sheet (£90mn as of May 2023).

It has been generating c. 35% operating margin over the past 10 years. The margin will likely expand following the deal with Amazon.


  • Macro. Even though GAW's customers are loyal and passionate, their spending is still dependent on the overall economic cycle.

  • Changing consumer preferences. The company's product doesn't solve a critical issue for customers. It is an entertainment product and, as such, is at risk of falling out of love with consumers or struggling to win new customers beyond the existing base. There have been a few negative reviews on YouTube about Games Workshops. It is worth keeping a close eye on how the Warhammer community feels about the company.

  • Amazon deal. Perhaps counterintuitively, but there are some downside risks from this deal. Its future depends on how successfully Amazon will adapt the Warhammer. Its recent experience with the Rings of Power has not been particularly strong and received mixed feedback.

Breedon Group Plc

Ticker: BREE LN
Price: £3.09
Mkt Cap: £1,050mn
EV: £1,270mn
Breedon is a construction materials company operating in the UK and Ireland. It supplies asphalt, aggregates, concrete products, cement, roof tiles and other materials. It also provides surfacing services.

Breedon was listed on AIM in 2008 as a special-purpose vehicle focused on acquiring construction materials suppliers in the UK and other countries. In 2010, it acquired Ennstone plc through a reverse takeover whose main operations were aggregates, asphalt, ready-made concrete and contracting services.

Why it is interesting

Breedon has increased its sales at 21% CAGR during 2011-2022, reaching revenue of £1,396mn last year. Its operating profit has increased from £6mn in 2011 to £155mn in 2022 (+34% CAGR).

The company captures the full value chain, including the raw materials, which helps it to control margins better and is an additional competitive advantage.

The company has been an active industry consolidator, undertaking 20 acquisitions, including large deals and six bolt-on acquisitions, and raising additional equity along the way.

In 2016, Breedon acquired another construction materials supplier, Hope. The latter was founded by Amit Bhatia, the son-in-law of Lakshmi Mittal, the founder of ArcelorMittal.

Mr Bhatia is now the chairman of Breedon and an 18% shareholder. Interestingly, he doubled his interest during 2023, making the latest purchases in early October at £3.38 per share.

In 2023, Breedon was admitted to the main market of the LSE.

Why now?

A significant increase in ownership by a prominent insider (chairman Amit Bhatia) piqued my interest earlier this month.

Besides, the company's stock has been weak on overall concerns about the UK economy, specifically its construction sector. However, Breedon has relatively low exposure to the residential sector, with c. 50% of sales accounting for the infrastructure sector and 30% for Industrial and Commercial segments.

If the Labour Party wins the next elections in 2024, the new government will increase spending on construction. At a recent Party conference, Shadow Chancellor Rachel Reeves unveiled a series of reforms that would see a Labour government “get Britain building again”. The plans would “accelerate the building of critical infrastructure for energy, transport, and technology”, according to Reeves.


Breedon has recently introduced a progressive dividend policy, but distributions have been insignificant so far. For 2022, the company paid a dividend of 10.5p per new share (3.2% yield), corresponding to a 29% payout ratio (2022 underlying EPS was 35.4p). The company has introduced a progressive dividend policy. The interim dividend for H1 ’23 was raised 14% YoY to 2p (0.6%).

With the overall economy slowing down, the business is expected to increase its top line by just 3% annually in 2023 and 2024, according to consensus estimates. Operating profit, meanwhile, is expected to remain flat at around £150mn.

The company is currently valued at 8.3x EV/EBIT and 11x P/E.


Some of the issues that stop me from buying the stock include valuation. It is not cheap by UK standards, especially for what looks to be a company with a basic product. The country is still facing high macro risks. Cement is highly energy intensive and emits a lot of CO2, which will be a constant issue in the future.

Solar Edge

Ticker: SEDG
Price: $77
Mkt Cap: $4,355mn
EV: $3,494mn

This is probably the most controversial company in this edition of MSIL. It is an Israeli business supplying inverters for solar panels. The company issued a profit warning last week, which sent the stock almost 30% down in one day. It is also popular among retail investors based on surveys at various platforms (usually a bad sign, in my view). There are broader sector risks related to short-term oversupply and a slowdown in demand.

It is possible that the stock will remain under pressure in the near term, but it is worth keeping it on the radar since it matches a few criteria that make great long-term investments.

Why it is interesting

1. Energy transition is real. It may face occasional air pockets as the process depends on government decisions. The sector is also subject to the basic supply-demand laws, which means prices may fluctuate.

Despite this, there is a strong tailwind for operators and suppliers in the ‘clean’ energy sector.

The company could benefit from the US Inflation Reduction Act incentives to support clean energy producers in the country. It is worth noting, though, that many companies have applied, and hence, the exact benefits for SolarEdge are unclear.

2. Solar Edge is the market leader in the production of inverters. It is the number one producer by sales, excluding China, and the second-largest, including China. It leads the sector in more advanced product - optimised inverters, which are superior to more traditional ‘string’ inverters.

Inverters are the ‘brains’ in the solar panels as they get the power from the panel in the form of Direct Current (DC) and convert it into AC (Alternate Current). They match the phase of the generated electricity to the phase of the grid. Another essential function of inverters is to switch the panel on and off depending on the grid conditions (e.g. if there is a power cut, the inverter will turn off).

Optimised inverters maximise the performance of the panel by optimising each section. They also mitigate the effects of shading and a loss of performance due to debris (e.g. leaves).

My preliminary research of suppliers of inverters shows that Solar Edge is widely popular and, indeed, viewed as the industry standard by various distributors. Their products have the most extended warranty periods and are priced above average market prices due to more advanced features. The drawback of using more complex inverters is that they may require better natural conditions and perform poorly in humid climates.

3. Led by a founding team with a strong focus on R&D. The company was founded in 2006 by a group of five scientists and engineers, two of whom remain its shareholders. Meir Adest worked in Israeli research labs before co-founding Solar Edge, where he currently holds the position of Chief Product Officer. Yoav Galin, another co-founder, is in charge of Future Technologies at Solar Edge. He worked for 11 years in one of Israel’s national labs.
Management & Board collectively hold just under 1% of shares in the company.

4. Strong growth. The company has increased sales at a CAGR of 39% (2017-’22). Its operating profit, however, has lagged behind sales, growing at 26% annually. Profitability was negatively affected in 2022 due to supply chain disruptions.

By H1 ’23, SEDG shipped 119.6mn power optimisers, 5.2mn inverters and 213k residential batteries. Besides, over 3.5mn installations with multiple inverters are connected and monitored through the company’s cloud-based monitoring platform. For reference, the company sold its 10 millionth power optimiser in 2018, which means its cumulative shipments are now almost 12x bigger.

As of H1 ’23, SolarEdge shipped 47.9 GW of its flagship DC optimised inverter systems and 1.4 GWh of residential batteries.

Why now?

Stock is down c. 73% YTD, trading at new 52w lows.

The clean energy sector was highly popular in 2020-21, but has since corrected. There were too optimistic expectations built into stock prices which inevitably led to disappointment as actual performance lagged original forecasts. Some of the delays were caused by additional stimulus planned under the IRA legislation. The government takes time to review applications which leads to project delays.

However, the fundamental long-term outlook remains unchanged.

The company has its main office and production site (Sella 1) in Israel, which is now facing serious security issues which put further pressure on the stock.

SolarEdge is expanding its second production site (Sella 2) in Korea and a third one in Mexico. The company is expanding the use of contract manufacturers in the US and plans to establish its own manufacturing facilities in the country.

The company has delivered 36.2% revenue growth in Q2 ’23 (+39.9%% in H1 ’23).

It trades at 15x forward P/E and EV/EBIT of 13.7x (consensus estimates), although profitability remains below the historical level due to supply disruptions.


I am not an expert in this industry. I think the progress of Chinese manufacturers is hard to ignore. With so much interest in this sector, it naturally attracts more capital, eventually decreasing returns (e.g. airlines, autos in the early years). It is possible that an alternative producer would be able to deliver a more efficient and/or cheaper product in the future. Finally, the sector has benefited from government regulations and generous subsidies across the world, without which financial performance would have been much more challenging.

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