Every week, a professional investor tells MoneyWeek where she’d put her money now. This week: Marina Bond, manager of the Rathbone Smaller Companies Fund
In a market currently driven by momentum stocks – oil and mining, and emerging market stocks mainly – the more solid UK small caps have been left behind. Rather than throw caution to the wind, I prefer to stick with companies that actually make money, and have at least some fundamentals that can be assessed and valued. The companies below are good examples – a recent float; a recovery play; a stock that is just too cheap; and one that is simply out of favour with the market.
CVS (CVSG) the leading corporate group in the veterinary practice market, has recently floated on Aim. This is a highly fragmented market, with many owners retiring and selling up; CVS seems to be the buyer of choice. The company diverts all administration functions to head office, cutting the burden on surgeries, and creating synergies and economies of scale. The market itself is growing; rising numbers of single and elderly people mean increased demand for pets. It is also fairly defensive – animal lovers are unlikely to cut down on vet bills if there’s a consumer downturn. The group has strong management – the CEO was behind Vision Express, and the chairman is on the board of Dignity. It is not cheap, but earnings growth and cash generation are impressive.
Jarvis (JRVS) has an unenviable past – the volatile share price over the past decade speaks for itself. However, it has financially and operationally returned from the brink, thanks to the new management team, which came on board in September 2005. Through a painful restructuring process, the business has been refocused back into a rail and plant support services firm, renewing tracks and hiring out vital equipment and vehicles. These services are essential, and Jarvis’s supply of equipment – the largest and most up-to-date in the industry – would take many years to replicate. Jarvis still has some debt, and is very reliant on Network Rail, but the latter’s decision to keep Jarvis as one of four contractors for track renewals shows its commitment to the group. Jarvis is still in a recovery phase, but its order book is building steadily.
Titan Europe (TSW), the wheel and track maker, is benefiting from strong agricultural and mining markets. Barriers to entry are high due to the capital costs needed to make big wheels, and facilities over Europe, Australia and India would be tough to replicate. In these favourable market conditions, the company has shown pricing power in its ability to pass higher raw material costs to customers, and margins have been rising. This is a well-run company that is benefiting from global growth, and the rating appears to have been somewhat left behind.
I have mentioned Inland (INL), the brownfield developer, in this column before. But I still feel this little company is extremely good value. Its shares have suffered of late, being in the property sector, but recent announcements show that it is doing rather well. Inland specialises on getting land through the planning system, a process that housebuilders find increasingly hard. In fact, some builders only buy land once planning has been granted, which puts Inland in a very strong position. It has recently been granted planning for its largest site at Farnborough, which increases its estimated net asset value (NAV) to some way above the current share price. Having proved its credentials at Country & Metropolitan, this is a management team to back.
The stocks Marina Bond likes
Stock, 12mth high, 12mth low, Now
CVS, 236p, 218.5p, 233.5p
Jarvis, 93p, 56p, 85.5p
Titan Europe, 257p, 200p, 227p
Inland, 62p, 38.5p, 48p
Update 16/11/07: Titan Europe has since issued a profit warning, with problems including delays in passing higher costs on to customers, and higher-than-expected demand from the agriculture sector, which forced the group to buy more expensive materials, hitting profit margins. Ms Bond says: “I normally have a zero-tolerance policy on profits warnings and sell straight away if I can. But I think the sell off has been overdone, and retain a reduced holding.”