Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Nick Williams, head of Barings’ Small Cap Equities, and manager of the Europe Select Trust.
The market’s crisis of confidence over Greece and other southern European euro members appears to be reaching a climax. Whether or not individual countries are forced out of the euro, the economic growth prospects of these countries and the wider European region have been damaged. The ongoing upswing in world trade is unlikely, though, to be derailed by Europe’s woes. On this basis, and given the generally positive tone of corporate results and the outlook for 2010 as a whole, we’re cautiously optimistic about European smaller firms.
Our underweight positioning in Portugal, Greece and Spain is likely to remain in place. Nevertheless, valuations are becoming more attractive and volatile market conditions can throw up interesting stock-specific opportunities.
Our overall strategy hasn’t deviated from focusing on long-term value-creating companies with undervalued growth prospects. While economic recovery is becoming increasingly entrenched in northern Europe, as evidenced by generally positive corporate results, companies with solid growth prospects don’t appear over-valued, particularly within the media, medical technology and business services sectors.
In the latter sector, Irish company DCC (ID: DCC) is our first pick. Approximately two-thirds of DCC’s profits derive from its oil distribution business. This caters to domestic and commercial customers in Britain and Ireland. Its other businesses, selling electronic gaming equipment to consumers across Europe and its waste-management arm, also make a meaningful contribution to group profits. And its financials are impressive. Over the past ten years it’s delivered a compound annual growth rate in earnings per share of 10.6%. It has also delivered a compound annual growth rate in its dividend of 14.4%. In both cases there was no down year. The firm has a strong balance sheet and appears to be well-placed to make strategic acquisitions to enhance its future profitability.
Italian financial services group Banca Generali (IM: BGN) also looks interesting. Banca Generali’s private banking arm saw sizeable inflows during 2009’s tax amnesty. This was granted to encourage Italians to repatriate money secreted overseas. And its fund platform, one of only a few open-architecture platforms in Italy, has seen big inflows. The quality of the management team and their determination to grow the business profitably is the key to Banca Generali’s current success. Although volatile market conditions could certainly make things more challenging in the short term, the stock has strong long-term growth prospects that are currently under-recognised.
My third pick is Virbac (PAR:VIRP), an animal healthcare company based in France. The high-calibre management team, their approachability and meticulous grasp of the company’s financial position continue to impress. Virbac, which specialises in treatments for pets and farm animals, has been growing strongly via a combination of new product launches and acquisitions, most recently in Australia. Encouragingly, the firm has reported that demand for its products in India is growing rapidly too. The icing on the cake is a recent vaccine treating the disease leishmaniasis in dogs. This could potentially be a big seller. Finally, Virbac is expanding its market share in America, where its treatments for various conditions afflicting horses are seeing growing demand.