Fair Isaac Corp. (FICO)

Current US administration is allowing competition in the space. Worries on competition for volume as well as on price. His firm doesn't see competition as material, as entrenched ecosystem makes it difficult to migrate to a new system.

All of his Top Picks today have no momentum or key catalysts. Just excellent, well-run businesses that will add long-term value. Doesn't know how they'll look 1 year from now, but will certainly look good 3-5 years hence.

Credit scoring. Stock's beaten up on worries of regulatory changes in credit-scoring. Fundamentals still incredible. Essentially a monopoly. Topline earnings up 39%. Incredible ROIC. 

Trading at 23-24x PE, used to be 100x PE. Cheap for such a quality business. Management owns a big chunk. Lower interest rates may spur a pickup in loan volume. No dividend.

In Canada we have credit scores; in the US, people talk about a FICO score because of this company. Has been around forever, basically an oligopoly. Mountains of data. Extremely well run, profitable. As a value manager, expensive even with the drop. 

Concern is how could AI potentially dethrone its moat? Also, competitors could potentially access and capitalize on its data. Economic slowdown would lead to contraction of credit, so its revenues from credit checks might go down.

The government has been unfair to them.

Shares are down after an official in the Federal Housing Finance Administration made comments about the agencies push to a two-tier credit score from a three-tier in a bid to lower overall mortgage costs. This would certainly hurt FICO's growth if implemented, but the materiality of it may not be as much as the stock drop indicates. Still, it has changed sentiment and we are generally cautious stepping into these 'falling knife' situations, and here, with valuation at 58X earnings, we would see waiting (not buying) as the best option.
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This has survived countless fintech companies that can't beat FICO. They provide software to companies to manage credit risk. Is up 5,732% over 20 years.

Yesterday, they reported a sizable top and bottom line beat, accelerated revenue growth and raised their full-year forecast, but not as high as the street expected. So shares plunged 7% today. Also, the street is worried about long-term interest rates going higher.

He suggested waiting for a pullback, but it's recently rallied 15%, though pulled back today 7% because they missed top and bottom, though reiterated gull-year forecasts. But analysts expected better.

The #14 stock on the S&P last year, up 94.5%. They created and own the FICO credit score, drawing revenues from companies and individuals alike. Their software business is strong, amounting to about 50% of their sales. They're innovative and keep offering new products. Banks are key clients who need credit scores. Software revenue was up 11% and annual recurring revenue was up 22%. Retention rate was 120% (gaining more business). Their performance supports a rising PE. But it now trades at 47x PE, higher than peers, too pricey. It'll likely pullback. A fine company.

No one will build a better mousetrap than FICO.