Every week, a professional investor tells MoneyWeek where he’d put his money now. This week: Ian McVeigh, manager of the Jupiter UK Growth Fund.
In bull markets, investors periodically suffer vertigo. After four years of rising markets, that seems to be happening now. Slowing US growth and rising UK interest rates fuel these jitters, as does news that equities are at seven-year highs. But consider it the other way round. Equities are only back to where they were seven years ago. Yet the market is rated far lower than at the peak of the tech boom in 1999, on a p/e of around 13, compared to 23 then. Since then, cumulative earnings growth has been around 68%, while long-term interest rates have fallen. While in the short term volatility may edge up from current low levels, investors should be well rewarded on a three-year view, which is typical of the time horizon one has to take with equities.
But finding shares that offer strong long-term growth potential is no easy task. You need a flexible strategy with no constraints on investment style or company size. I pick what I believe are the very best stocks in my three chosen categories: growth, value and recovery. I then hold the shares over the long term – a ‘buy and hold’ strategy that takes patience, but is crucial to good long-term returns.
Three stock market picks for long-term growth
Engineer Charter (CHTR) makes welding consumables and power turbine fans. I bought the stock as a recovery play at an average price of 135p following a ‘rescue’ rights issue in 2004, which came after a loss-making 2003. I expected chief executive David Gawler, with his great record as a recovery expert, to turn the business around. Charter had sales of £1bn. I felt this could deliver operating profits of £100m once the group was fully cost effective, given a comparable margin of 10% at US competitor, Lincoln Electric. The stock has risen strongly since, boosted by a series of earnings upgrades, and currently trades at about 1,042.5p. No longer a recovery holding, Charter has moved from being a value play to becoming a fully fledged growth stock. Although I have taken profits along the way, I still hold a significant position and believe its earnings outlook remains strong.
Royal Sun Alliance (RSA) is a good example of a value stock. I bought shares in the insurer at 75p, when they were trading at a massive discount to the sector. At the time, 17 out of 18 analysts gave the stock a ‘sell’ rating after years of falling profits due to problems at its US unit. But new chief executive Andy Haste refinanced debt and made large write-downs in the US assets. I also expected the industry-wide trend of rising premiums to lift profits. My optimism paid off. The stock now trades at about 170p, but still looks undervalued.
Xstrata (XTA), a producer of copper, nickel and coal, with assets in South Africa, Latin America, Canada and Australia, is the Jupiter UK Growth Fund’s main holding in the mining sector. I bought the stock at 650p when it was significantly undervalued against blue-chip peers such as Rio Tinto, due to its controversial management. However, strong resources demand from China boosted commodity prices and Xstrata’s management launched a string of debt-funded business acquisitions, prompted by an aggressive reappraisal of the outlook for metal prices. These deals drove the company’s earnings expectations higher and addressed the problem of the relatively short lifespan of the company’s mining assets. At the current price of around 2,800p, I do not think the stock is priced for anything like a super-cycle, if indeed that is what the commodity market is now in.