Andy Brough, manager of the Schroder UK Mid 250 fund tells MoneyWeek where he’d put his money now.
Technology is back on investors’ radar screen. With phrases like ‘eyeball-attraction strategies’ and ‘e-convergence’ being bandied about again, it feels like the market has travelled back to 1999/2000.
We’re not planning to dump our old economy stocks just yet – we’re sticking with an old-fashioned focus on valuations and demand-driven profits growth – and remain underweight technology in our portfolios.
But there are opportunities around, both pure-play stocks and established firms using technology in an intelligent way to improve profitability.
CSR (CSR) is one example. It produces single-chip wireless devices and is a leader in the Bluetooth market. We bought it earlier this year after visiting the firm’s management team in Cambridge. The market was then quite pessimistic about its prospects, but we expected to see some solid sales growth.
CSR is cash rich, has a sensible team in charge and, at 15 times earnings, is an attractively valued growth stock. The shares have done well recently, thanks to strong results and positive news flow on deals with iPod and Samsung to supply Bluetooth technology.
We’re also looking for firms using the internet to boost sales and margins. Recent statistics suggest that £1 in every £7 is now spent online. Findel (FDL) has spotted this trend and is gradually shifting its focus from traditional distribution channels (direct sales of educational and home goods through catalogue and home delivery) to the internet. By reducing the size of their brochures and directing customers online, Findel has increased its customer retention and improved profit margins.
However, as I said, we’re not abandoning the more traditional areas of the market and remain fans of the basic industries sector.
Many stocks in the construction and materials area have underperformed in recent months following what, in our view, is the market’s overreaction to the impact that the slowing consumer could have on housebuilders. But given the need for continued growth in new homes in the UK, we still see medium-term growth here.
In addition, there are opportunities among stocks – Carillion (CLLN) is one of our favourites – that will benefit from Private Finance Initiative (PFI) schemes, which are not correlated to the consumer. The future cash flows from these PFI schemes are discounted at a rate of 10% and, with UK gilts getting less attractive as an asset class, the value of these PFI contracts is gaining a lot of interest among traders in the secondary market.
Finally, Babcock International (BAB) is a fairly recent purchase. Babcock used to be an unwieldy engineering conglomerate focusing on the defence sector. But it has now transformed itself and become a wider support-services company. Its existing defence contracts are still important – it has recently signed an extension to its partnership with the Ministry of Defence (MoD).
However, its acquisition last year of Peterhouse has broadened out its operations so that sales to the MoD represent less than 50% of turnover. The company could see strong medium-term growth in several areas – it has been bidding for school contracts, while the national grid (where it has a leading position) may have to double its present spending to maintain and upgrade its infrastructure. Recent results have reflected the firm’s growth prospects – first-half profits for this year more than doubled thanks to the company’s extended contracts and new business wins.
The stocks Andy Brough likes
| 12-month high | 12-month low | Now | |
|---|---|---|---|
| CSR | 858p | 301p | 843p |
| Findel | 540p | 400p | 450p |
| Carillion | 304p | 213p | 302p |
| Rexam | 217p |
119p |
211p |