Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Gervais Williams, managing director and fund manager at MAM.
Many investors are finding it particularly difficult to make investment decisions at the moment. The markets are hugely volatile, and with Europe still in a mess, there could be sudden major changes on a weekly basis. So what are the right kinds of investments for such difficult conditions? Here are three that I think fit the bill.
Insurance firms seems to fit in with this climate reasonably well. Typically, they have portfolios of short-term government debt that tend to hold up relatively well in the uncertain markets. On top of that, it could be argued that insurance is all the more important in troubled times.
One of my favourite firms is Abbey Protection (LSE: ABB), a small company with a market capitalisation of only £80m. It assists smaller businesses in dealing fairly with staff redundancy. This is an area where legislation is detailed and extensive, and Abbey ensures scrupulous adherence to correct processes. If the matter does go to tribunal, then the costs are covered by the insurance policy taken out by the business. Abbey has a very strong balance sheet, with over £18m of excess cash, a good and growing yield of 5.5% and a price/earnings (p/e) ratio of 10.8 to December 2011, falling to 9.5 on current forecasts.
Another firm I like is PayPoint (LSE: PAY). It is somewhat larger, with a market capitalisation of £342m. This company works with a range of convenience stores and forecourt supermarkets to assemble a national network of local payment operations that is open long hours and close to most people’s homes. Its network is useful for sorting out utility bills with cash payments, although it is also moving into taking collection of mail-order parcels. Once again, the company has a strong balance sheet, with £26m cash, an attractive dividend yield of 5.2%, and a p/e ratio of 13 for the year that has just finished this September. That falls modestly to 11.7 times in the coming year on current forecasts.
My final choice is Stadium Group (LSE: SDM). This manufacturing business has operations in the UK and China, and issued a mixed trading statement this week. Buying into stocks on share-price weakness can be a smart move. This firm is very small, with a market capitalisation of only £18m, but it has a good reputation for making high-accuracy electrical assemblies with good reliability.
Although Stadium does have a modest pension deficit to fund, the company is well capitalised, with a cash balance of over £4m on the balance sheet. The dividend yield is 4.7%, but this should grow as the underlying business trades on a p/e ratio of 8.7 to December 2011. That is likely to fall to just seven over the following year on current forecasts.
Overall, the share prices of these companies (notwithstanding mixed trading statements) tend to fluctuate more modestly than the market overall. Whether the stock exchange is diving deep or flying high, these shares tend to remain more stable, so they are some of my largest holdings.
Of course, no firm is invulnerable. But by holding a decent number of robust stocks of this type in a portfolio, an investor should continue to make decent gains over the longer term, despite the current economic conditions.