Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Phil Webster of the Aberdeen Smaller Companies High Income Trust.
While this has been a hugely turbulent period for world markets I am always surprised when it comes to the crunch that good-quality companies seem to get thrown out with the bad. It’s at times like this that it’s important for investors to look through short-term volatility. We focus on balance sheets for evidence that a business can survive tough times.
If nothing else, the last few years has cemented this approach and because we meet all the companies we own twice a year we can couple balance-sheet strength with an assessment of operational performance. There are times when share-price performance and operational performance can decouple and that has certainly been the case of late. So here are three firms that we believe have the strength to deliver throughout this difficult phase for markets.
Euromoney ( LSE:ERM ) is a leading provider of subscription-based business-to-business information, training and events, especially in the financial and commodity sectors. The business has successfully developed digital products that allow it to benefit, rather than suffer, from the proliferation of electronic content that supports 30% group margins. The largest business in the group is BCA Research, which is a leading independent provider of global investment research.
Euromoney acquired BCA in 2006 with Metal Bulletin and has invested in the product and in sales and marketing. That is also the strategy it aims to deploy with its recent acquisition, American-based Ned Davis Research Group. The group can fund these deals out of cash and retains a strong balance sheet. After the recent share-price fall the business is now trading on a price-to-earnings (p/e) multiple of 9.5 times next year’s earnings.
Victrex ( LSE:VCT ) is the leading global integrated manufacturer of PEEK polymer, a high performance thermoplastic. The Group comprises two divisions. Polymer Solutions focuses on industrial, transport and electronic markets. Invibio Biomaterial, meanwhile, provides specialist solutions for medical device manufacturers. The market is a virtual monopoly that Victrex has exploited to get close to its customers. The key barrier to entry is the critical nature of the product and the high cost of failure for the end customer. With its interim results it also announced a significant expansion of its manufacturing facilities to support the future pipeline. On top of this investment the business continues to retain a very strong balance sheet, to the point where cash was returned to shareholders last year even as the interim dividend rose by 25%.
Rathbones ( LSE:RAT ) is a private client fund manager with £16.4bn of predominantly discretionary assets under management. Although considered by some to be a play on volatile stockmarkets, the private client industry has a loyal client base that sees Rathbones as a service provider and an asset manager. It has certainly performed well through the recent crisis. Regulation has proved a burden for all financial institutions, including Rathbones. But management look to be ahead of the curve on this issue, which reinforces the conservative nature of the group. Quality businesses of this type, with a relatively low-risk balance sheet, tend to trade at a premium to the market. Yet Rathbones trades on an attractive 11.4 times earnings with a well covered 4.8% yield to boot.