Every week, a professional investor tells MoneyWeek where he’d put his money now. This week: Vincent Devlin, Scottish Widows Investment Partnership.
Our European Fund has been designed to profit from the best research ideas using selective stockpicking. We look for stocks with medium- to long-term earnings growth potential – stocks that are often not well understood by the market. We have a research unit that looks at 3,000 firms, covering 15 countries and 35 industries. Using valuation momentum and growth measures, our 11 analysts screen the firms and cut the 3,000 down to 350. After a team discussion, a list of companies to buy, sell and hold is drawn up, and from that I select my portfolio holdings.
One area where we have beaten our competitors is in the mid-cap initial public offering (IPO) market. Newly quoted firms lack historical data, which makes them difficult to value for the first time. We are very good at assessing such firms, and we have uncovered a number of winners over the past 12 months. Two in particular are the Netherlands’ Wavin (NL, 29085) – a construction group that makes plastic pipe sections for drainage, water and gas systems – and Sweden’s Lindab (SE, LIAB), the leading supplier of steel sheet and steel-based building systems in Europe.
Wavin listed in October 2007 and has since capitalised on the growing trend in the industry of substituting plastic for steel and copper piping. The firm grew 9% last year and is expected to grow a further 7% this year. Its fastest-growing areas are eastern Europe (expenditure on infrastructure in this region is considerable and sales for the group were up 28% last year) and hot and cold water pipes. Both of these command higher margins than other areas of the sector. Solid growth should therefore be accompanied by rising margins, leading to impressive earnings potential over the next few years. And Wavin is looking to enhance this growth through bolt-on acquisitions. These purchases would complement earnings growth and could provide further pleasant surprises.
Lindab, which came to the market at the end of last year, is another play on firms with a healthy exposure to the lucrative central and eastern European construction market. The group should continue to benefit from secular growth trends in steel structures, which are replacing traditional building materials such as concrete and wood. In addition, Lindab is enhancing margins through a combination of cost savings, growth initiatives and strong pricing power. The latter, combined with its rich diversity of geographies and products, should give rise to healthy earnings.
My final recommendation is Tele Atlas (NL, 23394), a Dutch company engaged in the development, production and sale of digital map data. The company’s maps cover over 21 million kilometres of roadway in 64 countries and its products are used in satellite navigation systems. This is a growing industry, with new entrants in the personal-device market, such as Nokia (through its acquisition of Gate5), driving up competition, innovation and, most importantly, affordability. Indeed, as cheaper personal navigation devices, personal digital assistants, web-based products (such as Google Earth) and mobile phones develop, so will the demand for mapping databases. Another reason to support this stock is that the industry is effectively a duopoly between Tele Atlas and Navteq, allowing both companies to gain from its expansion while retaining pricing power.
The stocks Vincent Devlin likes
Stock, 12mth high, 12mth low, Now
Wavin, e18.00, e10.90, e17.50
Lindab, SEK146, SEK86, SEK144
Tele Atlas, e17.90, e10.81, e16.03