Each week, a professional investor tells MoneyWeek where she’d put her money now. This week: Jane Coffey, head of equities, Royal London Asset Management.
The British equity market has given investors a bumpy ride on the way to delivering a 7% gain for the FTSE All-Share so far this year. The first-quarter rally dissolved into a spring rout. Then the market rose from the beginning of June and matched the previous March peak. Although economic growth is weaker globally than investors had predicted in the first quarter, politicians and central banks have delivered more stimulative policies than could have been imagined.
The eurozone, while still shaky, has progressed further towards political and fiscal union. Nonetheless, as we approach the third-quarter reporting season, I’m cautious about holding firms where there is a risk of downgrades. Thus my three stocks aren’t too dependent on a supportive economic backdrop.
The first company is Tui Travel (LSE: TT), which owns Thomson holidays and a range of more specialist tour operators. Despite the ongoing decline in volume in the package-holiday market, Tui has seen improved profitability as it adjusts its product mix away from the mass market to its more specialist range.
Recent company statements also confirm that the late-booking market this year was strong. That’s because the Jubilee and the Olympics delayed many people’s holiday plans and wet weather pushed others into booking a late trip to find some sunshine. More importantly, the well-publicised troubles at major rival Thomas Cook – where a weak balance sheet suggests an unstable future – has encouraged the best hotels to commit to exclusive deals with Tui and given customers more confidence in the security of their advanced bookings. With an improving quality of earnings and cash flow, the company is attractive, trading on a price/earnings ratio of below ten and offering a yield of 5%.
Melrose (LSE: MRO) looks attractive as it assimilates its recent acquisition of Elster. Its management team has a strong track record of acquiring, improving and disposing of industrial assets. Elster is the world leader in gas and smart metering technologies. Both these markets are underpinned by strong structural growth as natural gas increases its share of the energy market and regulations increasingly focus attention on the optimisation of energy usage.
Management has already identified significant cost savings, while shifting the product mix to higher-margin products. Although trading on a premium to the industrial sector, on a share-price multiple of 13 times 2013 earnings, Melrose offers higher earnings visibility and double-digit annual growth in the next three years.
Finally, I recommend Compass (LSE: CPG). Three years after I first tipped it here, CEO Richard Cousins has delivered much of the improved profitability that he promised. He has re-engineered the business and introduced the best practice from each geographic region into the others. As a result margins have risen from 4.4% in 2006 to 7% in 2012.
Astute acquisitions have also increased the firm’s exposure to faster growing opportunities in America and emerging markets. It’s now generating £700m of free cash flow a year, allowing it to increase dividends and continue its share buyback plan, thereby boosting earnings per share growth. Recent restructuring in Spain has weighed on the share price, but that offers investors the chance to buy this quality company at a lower price.