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WD-40, the graveyard cabinet and a hunt for special smaller companies

Scott Woods
Scott Woods
Portfolio Manager, Global Equities

I spend about nine weeks a year in a rental car looking for companies all over the world, discovering their products, operations and customers. Here's what I'm looking for.

The blue bottle, red screw cap and yellow logo of WD-40 are ubiquitous in the United States. Eight in 10 US households have the lubricant spray in their homes. So indestructible is its brand name that the WD-40 company has a “graveyard” cabinet at its San Diego headquarters dedicated to all the rivals that have tried unsuccessfully to snatch market share.

There is nothing unique or patent-protected about WD-40, apart from the smell. Even so, the brand name translates into a 20% profit margin1, which makes the lubricant an outstanding long-term investment.

I spend about nine weeks a year in a rental car looking for companies like this all over the world, discovering their products, operations and customers. At a time when everyone is fixated by Nvidia and Big Tech, smaller companies of up to $10 billion in market capitalisation are commonly ignored and offer an opportunity to generate investment returns above the market average. Often these companies focus on one profitable niche and are hardly followed by analysts. That makes it easier to find a hidden gem than with, for instance, Microsoft, which is closely monitored by 70 analysts.

Valuation discounts and investors’ mistaken assumptions

It has rarely been as interesting as it is now to invest in smaller companies. The valuation discount against big companies has rarely been this big. While small caps have historically traded at a circa 10%-15% premium to large caps, this has now reversed and small caps trade at a 15% discount to large caps.2 Meanwhile, I believe that the Fama-French Three Factor Model studies showing the “small cap effect” that smaller companies perform better over time still stands.

The small cap universe is very large, around 6,000 stocks. And typically we only invest in 70-90 of them. I look for companies with what Warren Buffett, the legendary US investor, calls an economic moat around the business model that provides a competitive advantage. Time and again, investors underestimate the long-term benefit of a competitive advantage. A competitive advantage translates into a high return on invested capital. Investors wrongly assume that this high return quickly shrinks back to an average return. We want to exploit this market inefficiency, as we have through owning WD-40.

But WD-40 is not the most profitable stock in our portfolio. Remarkably, that’s a UK maker of miniature wargames headquartered in Nottingham: Games Workshop.3 Thanks to a growing group of hobbyists buying its Warhammer wargame figures and paints, the company has an outstanding profit margin of more than 40%.4 Originally, the hobbyists were mainly British, but there are increasing numbers in the United States. What’s more, an Amazon TV program is being made starring British Superman actor Henry Cavill, which could strengthen the brand name even more.

From Belgian chemicals to a Munich beer hall oven

Turning to Europe, we have a Belgian holding that also shows the kind of quality smaller companies we buy. We have owned Azelis for a couple of years. The speciality chemicals supplier is the kind of company we are looking for: it has pricing power thanks to a fragmented supplier and customer base and makes a difference with the formulas it uses to put together its own products.

Valuation matters and we always seek to buy at an attractive price. For instance, for years we were interested in Rational, the German world market leader in ovens for commercial kitchens. But we only got a chance to invest in 2022 when the share price dropped because of general disinterest in industrial companies. Rational makes ovens for customers from Kentucky Fried Chicken to Buckingham Palace and Michelin restaurants. The ovens not only save energy but also staff: since the pandemic my local Italian restaurant in the UK has been operating with one chef and a Rational oven instead of two chefs. With the labour market tight, this is important.

On my recent travels through Germany, I saw the one millionth Rational oven with a golden rotary wheel. It’s in the famous Hofbräuhaus beer hall in Munich, dating back to the 16th century. Unsurprisingly, I had to take a look.

The mention of any specific shares should not be taken as a recommendation to deal.

Past performance does not predict future returns. All intellectual property rights in the brands and logos set out in this article are reserved by respective owners.

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WD-40, the graveyard cabinet and a hunt for special smaller companies

1 Bloomberg, average over five years to October 2024
2 Bloomberg, MSCI World Large Cap versus MSCI World Small Cap, October 2024
3 Columbia Threadneedle analysis, October 2024
4 Bloomberg, October 2024

Important information:

For professional investors and qualified investors only.

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act and relies on Class Order 03/1102 in marketing and providing financial services to Australian wholesale clients as defined in Section 761G of the Corporations Act 2001. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

In Switzerland: Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland.

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

This document may be made available to you by an affiliated company which is part of the Columbia Threadneedle Investments group of companies: Columbia Threadneedle Management Limited in the UK; Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies. columbiathreadneedle.com

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Important information:

For professional investors and qualified investors only.

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act and relies on Class Order 03/1102 in marketing and providing financial services to Australian wholesale clients as defined in Section 761G of the Corporations Act 2001. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

In Switzerland: Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland.

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

This document may be made available to you by an affiliated company which is part of the Columbia Threadneedle Investments group of companies: Columbia Threadneedle Management Limited in the UK; Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies. columbiathreadneedle.com

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