Every week, a professional investor tells MoneyWeek where he’d put his money now. This week: Richard Buxton, manager of Schroder UK Alpha Fund and head of UK equities.
Much as it may seem like the bull market has stalled, we don’t believe this is the end of the road for UK equities. Global growth is strong, central banks seem to have inflation under control and, in the UK, company profits are still meeting, or beating, hopes. We are also still finding a range of companies with strong prospects not yet fully recognised by investors, whether they be in the oil, retail, financial, pharmaceutical, or industrial sectors.
One of our top picks is oil and gas firm BG Group (BG). It has excellent management and keeps raising production volumes, which many oil majors are finding hard to do. The group has a key position in liquefied natural gas, a growing area of the global energy market. Yet its shares don’t appear to have kept up with its improving prospects and seem significantly undervalued.
Retailer Marks & Spencer (MKS) also seems to offer a great opportunity. Transformed under CEO Stuart Rose, its new clothing range and pricing policy are proving successful and the store refurbishment programme is accelerating. Marks & Spencer also owns substantial freehold property, opening up potential for sale and leaseback agreements and additional returns for shareholders. The impact of rising interest rates on the consumer is, of course, a consideration. But given the firm’s slightly older target market (less exposed to mortgage pressures) and the long-term attractions of the company, this looks a good time to buy in.
Food manufacturer Unilever (ULVR) is not getting much uplift from ice-cream sales this summer, but we still believe it’s a great firm. Like Marks & Spencer, Unilever has been put back on the right track, but still has the potential for further improvement in its profitability over the next two to three years. In particular, there is scope under a new chairman and finance director to accelerate the changes taking place in the business. Again, this stock isn’t immune to consumer weakness, but it offers real recovery potential.
At almost the opposite end of the scale is engineer Charter (CHTR). This FTSE 250 firm is almost entirely divorced from UK consumer demand and has seen significant profits and share-price growth over the past few years. Yet despite already impressive returns, we still believe there’s more to come. With strong demand from the Indian and Chinese welding and power-plant markets, and Charter taking market share from major players, its future still looks very bright.
Last, but not least, is British Airways (BAY), shares in which have sold off aggressively in recent weeks. The market seems to think that things are as good as they will get for Britain’s best-known airline, particularly with the abundance of budget operators and the impending ‘open skies’ deal. But with the current growth cycle for airlines showing no signs of ending, we’re not writing it off. It still has good pricing power (with the fronts of the planes full of high-paying customers) and ‘open skies’ doesn’t pose an immediate threat. Above all, its move to Heathrow Terminal 5 should generate attractive cost and revenue synergies over the next few years, which should mean significant profits growth.
The stocks Richard Buxton likes
Stock, 12mth high, 12mth low, Now
BG Group, 836.5p, 619p, 825.4p
Marks & Spencer, 759p, 559p, 635p
Unilever, 1,674p, 1,172p, 1,618p
Charter, 1,169p, 687p, 1,155p
British Airways, 579.8p, 337p, 423.3p