A professional investor tells MoneyWeek where he’d put his money now. This week: Leigh Himsworth, Royal London UK Strategic Growth
To overcome seasickness one is told to look at something fixed on the distant horizon, because looking at things close by will make you feel much worse. It is advice that might make sense in today’s stockmarkets too.
We know that current economic numbers are likely to be poor and may even deteriorate in the next few months, so the real question is whether the monetary medicine being given to the US economy will work, or whether it will just stoke up inflationary pressures.
You usually have to wait a year or so until you find out whether interest-rates cuts have worked, which suggests that we won’t know for the US until September 2008, and for the UK until December (here rates were only cut in December 2007, so we may have a little longer to stew).
Overall, it is impossible to tell how the next year or 18 months will turn out, although if I had to nail my colours to the mast, I’d say that I don’t expect a very quick turnaround. The seriousness of the current problems is far in excess of anything we have seen since the early 1990s and there are significant underlying structural problems yet to be resolved in the financial system. Until these have been addressed, cutting rates or fiscal stimuli cannot hope to revive matters.
Is this gloom priced into markets, with the All Share standing on a 2008 forward multiple of 11.3 times earnings and a prospective yield of 3.9%? How can we know if we haven’t yet ascertained how serious the problems are? And how can we construct a portfolio to cope with such levels of uncertainty? At such times, all we can do is look for companies with a strong management team that achieves high returns and has a prudent approach to debt – at the right price.
As an ongoing policy, I try to make sure that I have no exposure to stocks with significant balance-sheet risk, high levels of net debt, tight interest-payment covenants, a large pension fund, or other such potential banana skins. I aim to build the core of the portfolio around stocks that have a strong balance sheet; high free-cash generation; some element of pricing power and therefore high returns; a reasonable degree of earnings visibility; a strong management team.
In the short term, opportunities are being thrown up as stocks are suddenly oversold. But I’m also looking for long-term value in stocks that tick most of my boxes, but lack short-term earnings visibility and have a more questionable outlook.
Examples include IT hardware group Spirent Communications (SPT). The business was restructured after a torrid early 2000 and the group has now emerged with an attractive product set, selling into a growing market for telecoms testing, and with an incredibly strong balance sheet: it has around 25% of the value of the firm in cash.
Specialist chemical manufacturer Victrex (VCT) is also interesting, in that it is an exporter and so could do very well out of the falling pound. Again it has a net cash position.
Another pick is International Personal Finance (IPF), which could do well out of providing Home Collected Credit in new territories, such as Central Europe and Mexico. The loan supply and collection techniques, systems and accounting have all been proven at Provident Financial (from which the group was spun out in the summer of 2007), and funding is secure for the foreseeable future.
The stocks Leigh Himsworth likes
| Stock | 12mth high | 12mth low | Now |
| Spirent Communications | 80p | 49p | 62p |
| Victrex | 823p | 572p | 721p |
| Int Personal Finance | 271p | 171.75p | 225p |