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Profitable Niche: Is This Business Too Good to Ignore?

So, you want to retire early and/or buy a Maserati?

Studies show the most probable way to achieve this: you should start, get involved with, or buy into a business that has a profitable niche.

As equity investors, we can buy shares in such businesses. And potentially enjoy their growth and income.

Hard-won experience tells me such businesses exhibit certain characteristics:

• High margins
• Regular and ongoing consumption by customers
• A protected position in the market
• Strong and growing demand
• Responsive to marketing and promotion
• Established or cost-effective distribution network
• Favourable market demographics

Very few businesses exhibit all these characteristics in a lasting way.

Some may have a window of opportunity for several years. Before other competitors romp in. And force down margins.

Sometimes the marketing investment stops producing a meaningful return.

Other times, the protections in the market disappear.

For a decade, I owned a business that had a major client exhibiting all these characteristics of a profitable niche. They produced health and skincare products.

In the local market, they were one of the few producers of quality. And they soon came to dominate direct-advertising networks, securing a market position.

Much of the advertising was innovative. A skin advertisement I developed showed the effects over time of their skin product. It used an animation to morph a series of facial photos. You could see the women’s faces firming in front of your eyes!

Then more competitors came to market. TV viewers and advertising options changed.

And the growth story became more challenging…

But the lessons remain. And when looking for equity investments that could generate both capital growth and burgeoning income, I look for features that could define a long-term profitable niche.

Health and medicine is one industry that meets many of these requirements.

Patent-protected pharmaceuticals feature high margins, strong demand, regular consumption, a superb distribution network — via doctors, pharmacies, clinics and hospitals — plus target favourable demographics in wealthy, ageing populations.

So why haven’t I recommended a great pharma business to you already?

The truth is that most of the good ones seem expensive. I’m struggling to see value. And I’ve been watching and waiting.

One of my favoured holdings is AstraZeneca [LSE:AZN].

It was also one of the first British-based stocks I bought. Their global HQ is in Cambridge, England. A friend of mine consults to them.

Now, AstraZeneca offers a reasonable dividend and fantastic potential growth story. But it is no longer available at the 4,000p at which I started buying the company in 2016.

As I write, it sits at nearly 7,400p. And it comes with a P/E of almost 60!

You are paying a premium to buy a business with a proven profitable niche — with the upside of a pipeline of exciting drugs.

So to meet our objective in Lifetime Wealth of obtaining value — with potential growth and income — I’ve been watching some others.

And there is one big pharma that could repeat Astra’s trajectory.

Of course, it depends on a lot of things. In particular, releasing innovative new drugs and making them profitable before old ones come off-patent.

That business is listed on the Euronext in Paris. It is the world’s fifth-largest pharma company by prescription sales. It is Sanofi S.A. [EPA:SAN].

Source: Bloomberg

Take a look at Sanofi’s fundamentals, compared to AstraZeneca’s:

Source: Interactive Brokers TWS figures as at 9:00am, 19 November 2019 GMT

Sanofi could exhibit current value due to past investor fear.

Investors are worried that as key drugs come off-patent and become exposed to generic competition, there won’t be enough in the pipeline to replace the revenue. Or the new research will not come on-stream soon enough.

This is called the ‘patent cliff’. It affects all large pharma companies.

But the fear around Sanofi has been worse due to Lantus.

Lantus is their key diabetes medicine. The primary patents expired in 2015. In Quarter 3 of this year, Lantus sales were down 17.5%. In the US alone, it’s down 32.5%. Only in emerging markets were they up (+9.5%).

Even after the falls, Lantus still represents nearly 8% of net sales in Q3 — or €751m.

Yet, the company is finding success in other areas which appear to outweigh the declines in diabetes.

Their new eczema treatment, Dupixent, is starting to close in on Lantus. Recently approved by the European Commission, sales shot up 140% in Q3 — to €570m.

Dupixent has 12 patents with an estimated expiry not until 2033 and beyond.

My wife suffers from acute eczema, and I’m well aware of how debilitating flare-ups can be.

Dupixent looks to have wide application across a number of allergy areas. And considerable tailwind as the affliction is growing.

I suspect, with Sanofi, there’s also the ‘Europe effect’ as a Paris-listed manufacturer. Slow growth and uncertainty across the region is delivering blows to equity markets.

But this can get overdone on some stocks. 29% of Sanofi’s trade is in emerging markets, where new growth is possible. Here, Sanofi has among the strongest presence across the big pharmas.

I’ve been here with Astra. I kept wondering if there would be a Brexit-buying opportunity on the stock. In fact, despite Brexit, the share price continued to surge due to the global market base.

Sanofi seems more price-tied in Europe — meaning there could be hidden opportunity.

The key growth areas for Sanofi are immunology and in emerging markets. Immunology is an innovative branch of medicine that targets the immune centre to fight disease.

When your immune system is not functioning as it should, it can result in disease, such as autoimmunity, allergy and cancer.

At the current share price, we are recommending a strategic buy on Sanofi.

There are, of course, risks. New products may not go as well as expected. The patent cliff on key medicines and generic competition will remain an ongoing pressure. Continued emerging market success will also depend on the global trade climate — which is coming under pressure right now.

Note: You will need EUR to buy Sanofi on the Euronext. Which is the other reason for this recommendation. We see the euro as one of the few softer large currencies against our investor target pairs.

Portfolio update

Aviva [LSE:AV] has fallen back from the initial rapid climb since recommendation. The company announced this week it would not be selling its major Asian assets in China and Singapore.

Investors were assuming they’d be sold with proceeds used to pay down debt or returned to shareholders.

For the short-run trader price, this is not good news. But over the long-run, if profits can be increased within these businesses — which has to be part of the strategic reason for keeping them? — then Aviva represents good buying for those with a longer time horizon.

Tassal Group [ASX:TGR] was nudging up to A4.30 earlier but has since dropped. The company announced to a UBS Australasia conference that it had followed a strategy for the first half of 2019 (financial year) of leaving salmon in the water longer to grow. This optimises biomass.

However, as a result, export sales have been significantly lower for 1H19. Strategically, this may allow the capture of better export prices in the future, but for now, the market does not like to see any earnings downturn to Tassal’s growth story.

For this business, seasonal variation and the global trade export outlook will remain significant risk factors. Yet we still see a favourable value gap at the current price. The business is materially cheaper than New Zealand fisheries company Sanford [NZX:SAN].

If you’re comfortable with increased risk, these dips for Tassal create buying or top-up opportunities.

Here’s our portfolio as of last market closes. ‘Buy Up To’ guidelines are adjusted to consider the current set of opportunities and represent a guideline only:

 Current as of 19 November 2019 at 9:00pm GMT.

Now, if you’re struggling with global brokerage and investing in some of these opportunities, we still have a few tickets remaining at our Investor Trading Event — Your Chance to Build Wealth in the Global Markets.

We’re keeping this group small to focus on Q&A and delve deep into the opportunities.

Our event is happening this Friday, so I’d really encourage you to book your place now.

(Use the special promo code LTWI_Discount to receive a deep discount off the ticket price.)

For those of you who’ve been investing since we started the Lifetime Wealth portfolio back in July 2019, you should now be seeing total gains across the spread of over 7%. That’s more than 8 times what you may have seen in a bank term-deposit here.

Do remember: most of our medium-risk picks are for the long-term. We’ll continue to monitor for changes in the businesses and alert you accordingly.

And, of course, I’m continuing to scour the global exchanges for the world’s best businesses.

Regards,

Simon Angelo

Editor, Lifetime Wealth Investor

Important disclosures

Simon Angelo owns shares in Sanofi S.A. [EPA:SAN] and Astra Zeneca plc [LSE:AZN].