A professional investor tells MoneyWeek where he’d put his money now. This week: Aidan Farrell, director of European equities at Insight Investment and manager of the Insight European Small Cap fund
There are many theories on what caused the recent turmoil in global equity markets: economic cycles, US consumer sentiment, credit concerns, the end of the carry trade, and so on. But it strikes me that any concerted downward trend in equity markets, whenever it occurs, can only be explained with the benefit of hindsight. The cause(s) may be among the threats mentioned above or something as yet unforeseen. So let’s try to avoid relying on the economic/credit cycle and pick stocks that, while not immune from the winds of change, have structural growth elements to help them weather them.
Theolia (FP:TEO) is one of Europe’s most attractive plays on renewable energy. General Electric clearly agrees, and is set to take a 23% stake in the group. Wind power benefits from long-term visibility for output prices and multi-year government investment plans. Financial incentives exist to significantly grow installed capacity and therefore increase reliance on renewable energy sources. For example, at the end of 2006, France had around 1,500MW (megawatts) of installed capacity versus government plans for 15,000MW by the end of the decade. With such attractive opportunities for Theolia in France and elsewhere, a strong project pipeline and now backing from the world’s biggest maker of power plant equipment, the potential free cash flow of Theolia is among the most compelling and undervalued in the utilities sector.
Although Millicom (US:MICC) can no longer be considered a small-cap stock, this emerging-market telecoms player cannot be ignored as a growth opportunity. With mobile-penetration rates mature in the Western world, large mobile operators are turning to emerging markets (eg, Vodafone’s recent acquisition of the majority stake in Hutchison Essar in India). Millicom, through its Tigo brand, has built up market-leading positions in recent years across many emerging economies in Asia, Latin America and Africa. Recent 2006 numbers highlighted the sheer pace of growth – revenues climbed 45% over the year, operating margins grew by nearly ten percentage points and subscribers reached 15 million in the fourth quarter, up 99% year-on-year. Penetration is climbing rapidly from a low base, growth which is yet to be reflected in the share price.
Magners, C&C Group’s (LN:CCR) international cider brand, has rapidly built market share in Northern Ireland, Scotland, London and now elsewhere in the UK at a pace that has amazed even C&C’s management. But following the spectacular rise since it listed in May 2003, C&C’s share price has suffered a hangover so far in 2007 with issues such as seasonality, competing products and overly optimistic City forecasts making investors wonder whether the Magners party is over.
But those who feel this product is a fad should look at C&C’s home market of the Republic of Ireland where, after 15 years, it has a market share of more than 10% of the ‘long alcoholic drink’ (LAD) market and is set to post top-line growth of 7% for the last financial year. A similar pattern is emerging in Northern Ireland. We are approaching only the second anniversary of the Magners launch in London and less than a year elsewhere in the UK, so it is very early days. With launches in two new countries to be announced shortly, a great management track record, cash rapidly building on the balance sheet and the summer ahead, the future still looks bright for C&C.
The stocks Aidan Farrell likes
12mth high 12mth low Now
Theolia e29.50 e10.66 e28.05
Millicom $81.03 $33.00 $74.51
C&C Group e14.05 e5.40 e11.61