Three stocks that are reaping the benefits of change

Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Alex Savvides, senior fund manager, JOHCM UK Dynamic Fund. 

Change is often neglected or misunderstood by the stockmarket; entrenched investment opinions can be hard to shift. I focus on companies that are reaping the benefits of change – here are three such stocks.

Specialist wine seller Majestic Wine (LSE: MJW) has suffered due to competition from supermarkets and a stale strategy reliant on outlet growth. Meanwhile, the company’s online presence has been underwhelming.

Our interest was piqued in February with the sudden departure of the CEO, with no successor seemingly lined up. In April, Majestic’s board then surprised the market by announcing a debt-funded acquisition of Naked Wines, an online, customer-funded, international wine business, and the appointment of its CEO, Rowan Gormley, as boss of the enlarged group.

This is a radical change with wide-ranging implications. It gives the group a highly regarded CEO, a well-developed online platform, diversification benefits via a fast-growing international presence in both the US and Australia, and the chance to combine the online and offline offers for revenue and margin benefits. There are many challenges ahead, but the potential for differentiation, growth and cost savings far outweigh these.

Recruiter Robert Walters (LSE: RWA) invested heavily through the recession and the benefits are starting to show. The shares spent 2014 in no-man’s-land, with some investors losing patience as increasingly robust revenues failed to be reflected in better earnings, largely due to a mixture of internal investment and currency moves. With the stock trading on nearly 30 times headline earnings for much of the first half of 2014, the shares looked expensive.

But in the second half, the fruits of the company’s earlier investment, allied to a strong cyclical recovery in a number of regions – the UK, continental Europe and parts of Asia – led to a succession of extremely strong trading updates.

This momentum continues: the company had a strong first quarter, due to rising permanent recruitment activity across the UK, and also in its international operations. Operational gearing means that results for the full financial year will be ahead of expectations, even at this early stage. This bodes well for the stock’s outperformance for the rest of the year, particularly given the buoyant UK employment market and brighter outlook on the continent.

Johnston Press (LSE: JPR), a publisher of local newspapers and websites, has struggled, as evidenced in its bombed-out valuation. Last summer’s refinancing should have been a turning point, but a nasty combination of a deeply discounted offering, a technical stock overhang and higher-than-expected borrowing costs hurt the share price.

However, buttressed by the wide margin of safety provided by the rock-bottom valuation, we think there are some attractions. The business’s profile is changing significantly, particularly around margins, cash generation and return on capital, as it goes from being a traditional regional publisher to a broader, digital-led regional media business.

We have confidence in this transition and in the value of local dominance enjoyed by the likes of Johnston, not least due to the fact that as part of the refinancing BSkyB took a £5m stake in Johnston and has entered into a strategic regional advertising partnership, using Johnston Press’s 1,600-strong advertising sales force and huge database of small and medium-sized business advertising clients.


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