Three British growth stocks

Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Toni Meadows, chief investment officer, Ashcourt Rowan.

Sluggish economic growth, limited scope for further cost-cutting and weak labour productivity improvements mean that many UK companies are likely to see muted profit growth in the near future.

Indeed, consensus earnings expectations for the FTSE 100 have been cut by approximately 8.5% since January and now imply that overall earnings for the year may fall slightly compared to 2013.

This may be why the FTSE 100 index has failed to break through to a new record high, above the 6,900 level so far, despite numerous attempts this year.

Against this backdrop, investors should focus on companies that benefit from structural growth trends, or enjoy resilient demand, irrespective of prevailing economic conditions. For some businesses, this could be driven by regulatory and legislative factors. For others, it could be inelastic demand for their products.

Although the shares of a company that can grow independently of broader economic conditions will generally command a premium valuation, we believe that this is justified and acceptable within reason.

Johnson Matthey (LSE: JMAT), the catalyst specialist, is a good example of a stock where regulation should drive structural growth. There is unrelenting pressure on vehicle manufacturers to reduce emissions, supported by increasingly stringent legislation, such as the Euro VI standards in Europe and the widespread adoption of similar directives globally.

Johnson Matthey’s market leadership and strong intellectual property base means the company is strategically well placed to continue to benefit from natural growth in demand for its catalytic technologies.

Tobacco companies like Imperial Tobacco (LSE: IMT) benefit from relatively inelastic demand among smokers. This, together with the oligopolistic nature of the tobacco industry, means that they have a significant amount of pricing power.

As a result, sales can be maintained at fairly stable levels, regardless of the economic climate. Imperial Tobacco has recently agreed to purchase a number of US assets from Reynolds American, following Reynolds’ proposed acquisition of Lorillard.

Although this will still require approval from the US authorities in order to proceed, the terms that Imperial has negotiated look attractive from a valuation perspective. The deal should add to earnings from the outset.

Lastly, Victrex (LSE: VCT), a speciality polymer manufacturer, is another company that stands to benefit from long-term structural growth in demand for its products. Once part of chemicals giant ICI, Victrex has a strong pedigree, a solid intellectual property base and dominates supply in its market.

Its specialist polymer grades have unique and critical properties that allow them to be substituted in place of metals in a multitude of demanding uses within the medical and industrial sectors. In many instances, its polymers improve upon the traditional materials they are replacing.

In an age where reducing energy consumption and emissions is high on the agenda, the benefits from replacing metal-based materials with suitable light-weight polymers are clear.

Airframe and auto manufacturers are fairly obvious users but the opportunities extends far beyond this. An imminent increase in its production capacity means that Victrex will soon find itself in a strong position to capitalise on rising demand.

The views expressed in this article are those of Ashcourt Rowan Asset Management and are not intended to constitute investment advice or investment recommendation. The value of investments can fall as well as rise and you might get back less than you invested. We recommend obtaining professional advice before making any investment decisions.

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