A professional investor tells MoneyWeek where he’d put his money now. This week: Andrew Jackson, manager of the Allchurches UK Equity Fund.
Our UK Equity Growth Fund has a significant proportion of its assets invested in a diversified selection of larger firms and we look to these to provide the bulk of our return. We do also, though, have a number of investments in smaller firms; unearthing these little gems and then watching them develop into core holdings is one of the great pleasures of stock picking. Below, I highlight three such stocks that I hope will make the grade.
Investing in small companies: long-term potential
Investing in SPI Lasers (SPIL) is very much about backing long-term potential. SPI is probably the world number two when it comes to exploiting laser power delivered down a fibre-optic cable. Compared to conventional lasers, these devices are smaller, more efficient and attractively priced. They are already being used for precise manufacturing and marking in the medical and electronics industries, and new applications are constantly being developed. SPI is also working on products for use in much larger industrial applications and already has prototype orders. The firm’s position is protected by a hatful of patents. Like all fledgling businesses, progress is unlikely to be straightforward, but we should start to see profits in 2007 with rapid growth thereafter.
Investing in small companies: a recovery story
Moving from SPI’s growth potential to a recovery story, the management team at Walker Greenbank (WGB) has pulled off a remarkable turnaround in its fortunes. The firm manufactures and sells mid- to high-end wallpapers and furnishing fabrics (think £20-£100 a metre or roll), selling them under the brand names Harlequin, Morris, Sanderson and Zoffany. In the face of a declining market, it would have been no surprise had the firm followed many other famous British names into oblivion.
However, the management focused its activities on its core strengths and ensured its manufacturing was efficient at the new volumes. Profitability has been restored and the good news keeps coming, because wallpaper is enjoying something of a revival among designers. With this firm foundation in place, serious effort is going into increasing sales to the US, where demand for classic British styling remains very strong. It doesn’t take much imagination to see what success on this front might do to the company’s fortunes. The last time I met the board, there was a tangible sense of excitement that the revival was gathering pace and I suspect profits are running well ahead of analysts’ expectations.
Investing in small companies: one to hold long-term
Warren Buffett says that his ideal holding period is forever, and if that is the case, then funeral director and crematorium operator, Dignity (DTY) should be in his portfolio. We’ve held this company since its flotation in 2004 and you could argue that it has already proved its worth, but I still think it warrants serious consideration. Thankfully, arranging a funeral is an infrequent occurrence, but as one of life’s ultimate distress purchases it comes down to an issue of service rather than price, and prices have traditionally risen at about 5% a year. The company conducts about 12% of all funerals in this country, but in any one local area it will have a much higher market share, being one of just two or three funeral directors. In other words, it has the business dynamics of a utility without a price cap.
Even with a static death rate, the company has shown that it can grow its operating profits, and with the deliberate addition of a judicious amount of debt, earnings growth should be in the mid-teens for some time to come. It’s difficult to argue that the shares are bargain priced, but they have the reassurance of quality.