Investors love little-known growth stories with proven successful strategies. Judges Scientific (LSE: JDG) applies a disciplined set of criteria in scooping up scientific instrument makers. That is a profitable niche. The Judges Scientific share price has soared in the past few years.
Recently the founder sold over three million pounds of his holding in Judges. What might this mean for the stock?
The Judges Scientific share price was already high
I think Judges is an excellent run business. It has identified an area with customers who have steady demand for expensive products. In scientific research, exactitude matters a lot – so customers are willing to pay a premium price for a high quality product. Through its discipline in buying companies at a low multiple of earnings, Judges has been able to build a diverse set of value producing assets which is hard to replicate. It matches a lot of what Warren Buffett suggests makes a good business.
The stock market had noticed this, pushing the share price upwards.
For example, the shares almost quadrupled between the start of 2017 and 2020. Over 2020 they moved around a lot. Shutdowns meant university labs and research institutes weren’t in such a rush to buy instruments. Those that were sold couldn’t always be installed quickly. Nonetheless, the robustness of the business model proved itself again and the shares added another £10 or so across the year. The organic order book at the start of 2021 was higher than a year before.
Last month the company guided that its adjusted earnings per share for the year would exceed market expectations. The Judges Scientific share price hit a new high. On 19th January, its founder David Cicurel sold 50,000 shares. That sounds like a lot and indeed it was a multi-million pound transaction. However, it was only 7% of his holding. After the sale, Mr. Cicurel still holds over 650,000 shares in the company he set up.
Valuation concerns
Directors sell shares for all sorts of different reasons. A sale in itself is not necessarily cause to concern.
I continue to find the business model compelling. The company has increased ordinary dividends each year by a double digit amount for over a decade now. I also expect that the pandemic will increase long-term demand for scientific instruments, so think that Judges Scientific’s growth story could actually still be in its opening innings.
However, the strong price rise in recent years has given me pause for thought. At a price-to-earnings ratio of 27, the shares are not cheap. While I like the dividend policy, the dividend yield sits below 1% due to the high share price.
But the well-constructed cash generative business model, quality assets and growing demand means that the share price has continued its ascent. It seems to have shrugged off the director’s sale and I don’t think the market is interpreting as a lack of confidence in the future Judges Scientific share price.
I will be spending time to examine the company and its market opportunity more closely to consider buying the shares. Judges Scientific probably has a magnifier that would be ideal for the task!