How to Beat the Market: Part 2


This is the second part of a two-part transcript in which'sDavid Kuo chats with Nathan Parmelee, Nate Weisshaar, James Early, and Charly Travers, otherwise known as The Motley Fool'sShare Advisorteam, about picking shares in the current market.

You can read the first part of the transcript here.You can listen to or download the full podcast here.

EDITOR'S NOTE: What follows is a lightly edited transcript of David Kuo's conversation with The Motley Fool's Share Advisor Team.

David Kuo: OK, now then, we're about to reveal one of the picks from our Share Advisor newsletter service. The company is Hargreaves Lansdown (ISE: HL.L) . Now, since it was you, Nate, that picked Hargreaves Lansdown, what were the attractions of Hargreaves Lansdown as a sexy growth share?

Nate Weisshaar: Well, just going back to what I said, Hargreaves Lansdown was very attractive to me, just because their business model is very asset-light. They don't have to invest a lot in factories or heavy assets, where you're dumping a lot of cash just to establish the business. Their model is Internet-based fund-broking, essentially, and so all you need to do is to set up the computer system, and the next new customer doesn't require that much more investment. So they are very good at generating cash flow, and they take this cash flow, and they invest it not only back into their business to make their operations better, but they also, being a fire share, and this might surprise you, they kick off a pretty decent dividend to shareholders, so this was attractive on several levels. The other thing that attracted me to them was the fact that their customer relationships, their customer satisfaction, was outstanding. Almost every review I've read was glowing, and over their history you can see just the growth in customers and Vantage account customers has been fantastic, so obviously they're doing something right, and by doing that right, they've built themselves the dominant position in the fund-broking business. So if you can combine the dominant market position with fantastic cash flows, that's pretty appealing. Then, when you add in the fact that the British investor is going to have to start taking more care of their own finances going forward, given the issues with pensions and the problems with the government cutting back on how much social benefit they're going to be willing to fund, I think going forward the ground is very fertile for new customers and continued growth.

David: And are you surprised in some way at the way that Hargreaves Lansdown has performed since you made that pick?

Nate: Only in the speed with which its returns have grown. They've done exactly what I expected them to do. The shares just responded a bit faster than I was expecting.

David: OK, that's excellent. Now James, you were given the responsibility, when Nate made that pick, to duel with Nate, and for those people who don't know what dueling is, James's responsibility was to challenge Nate on his pick. Now, in the duel, you asked Nate if Hargreaves Lansdown is affected by movements in the financial markets. How convinced are you now that Hargreaves Lansdown's business is relatively immune to financial events outside of its control?

James Early: Well, no company is immune, David. I would say this is a solid company. Two main events are outside of Hargreaves Lansdown's control. One is a poor market, and they've actually shown they can do OK in this type of climate, with ISAs, with pensions and the like. The other thing, though, would be regulation. Hargreaves makes quite a decent amount of money from fund kickbacks; in other words, they get a percentage of their fund management fee. So if this gets restricted, and this has been on the table off and on for a while, this is a material portion of Hargreaves' turnover that is going to be affected. Now, the upside, and they're going to have to scramble, the upside is that they have shown themselves to be fairly good at scrambling in the past.

David: Are you going to come back on that one, Nate?

Nate: Well, I think James makes a very valid point. There are legitimate regulatory threats to Hargreaves Lansdown, and these are something that investors need to be aware of. But I think the very fact that these proposals have been on the table for several years now means that the scrambling may not be as much of a scramble. Hargreaves has had time to evaluate the situation, and they've said several times over the past year or so that they have plans in place in case the worse should come about, but they're going on business as usual until they find out exactly what the situation will be.

David: OK, now Charly, when Nate made his pick, Hargreaves Lansdown was sitting on a P/E, a valuation of 20. Now, what kind of risks do shares of this high valuation have for investors?

Charly Travers: Well, David, I'd like to dispel the notion first that a multiple provided in isolation with no context provides any sort of information as to whether or not a share is cheaply valued or richly valued. Let's talk for a minute about...

David: You're paying $20 for every dollar of profit the company makes, Charly!

Charly: That is true, David, and if those earnings never grew, and the investor got paid out one dollar in earnings a year, it would take 20 years to get their money back, and if the business was not able to grow its earnings, you're correct -- that would not be a great deal. But in the case of a growing business, maybe that actually turns out to be a fair or even an attractive price. However, to your point, a high rating does require superb performance out of the company. The management has to allocate its capital intelligently to grow the intrinsic value of the business, and the higher the rating, the smaller the margin for management error there is. So there is a concern, but investors shouldn't just say twenty is a high rating; by default they should look into what the business is actually doing.

David: I feel suitably told off there, Charly. Now Nathan, sticking with Hargreaves for the final question, what kind of headwinds do you think Hargreaves Lansdown faces from now onwards?

Nathan Parmelee: I think primarily it's a soft market, is number one, but really there's nothing they or any of their competitors can do about that, and since it's such a strong franchise, we're comfortable with the company and its ability to manage through a soft market or a tough market. Really, the other issue we've talked about a little bit already, it was the retail distribution review. But at the time we recommended it, we felt that the company was already adjusting its fee model for this future reality, which we think will probably eventually come. So we think they're well along, and sort of being prepared to change over their business, and even already, I think, in some cases, starting to reduce and eliminate those fees on certain products. So we really think that they will manage through all right, regardless of the challenges that come in the near future.

David: OK, that's wonderful. Now then, I said that was the last question, but I do have a final, final question, and I only want a one-word answer from each of the four of you, and the answer is, either easy or hard, right? What I want to know is, in this current market, starting with you, Nathan, are you finding it easy or hard to find shares to invest in?

Nathan: Hard.

David: Hard? OK, and Charly?

Charly: Also hard. That's two words.

David: James?

James: Hard.

David: And Nate?

Nate: Hard.

David: I don't know whether that's a good thing or a bad thing, for four analysts to say it's really hard to find shares to invest in at the moment, but thank you ever so much, to all of you, for joining me today, and a special thanks to Nathan Parmelee, because you have taken time away from your wedding anniversary to talk to us today. Now, that is dedication indeed. So I think the three of us, well the four of us, should really thank Nathan for joining us today.

James: Thank you very much, Nathan.

Nathan: No problem.

Charly: Happy anniversary.

Nathan: I stuck it into my wife's gym time.

David: OK, so before I end, I have this quote to sum up today's podcast, and the quote comes from an American author called Margaret Carty, who said: "The nice thing about teamwork is that you always have others on your side." Hopefully we'll always have somebody on our side, whenever we have our Share Advisor meetings.

Nate: We hope so.

Charly: Indeed.

David: Well, I hope so, too. This has been Money Talk, I have been David Kuo, and my guests have been the four analysts on The Motley Fool Share Advisor newsletter service. They are Nathan Parmelee, Nate Weisshaar, Charly Travers and James Early. If you have a comment about today's show, please post it on the Money Talk web page, which you can find at If you want to find out more about Share Advisor, please go to, and until next week, have a great week!

That was the second part of a two-part transcript in which'sDavid Kuo chats with Nathan Parmelee, Nate Weisshaar, James Early, and Charly Travers, otherwise known as The Motley Fool's Share Advisor team, about picking shares in the current market.

To read the first part of the transcript,just click here.

David Kuo challenged his Motley Fool analysts to pinpoint the attractive sectors of 2012 -- and they delivered! Discover the industries they selected in this new Motley Fool guide -- "Top Sectors for 2012" -- while it's still free!

Further investment opportunities with David Kuo:

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