Three cheap but solid stocks

Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Joe Dyer, senior fund manager, Signature (part of Rowan Dartington).

Having faced the prospect of a European banking crisis, the European Central Bank (ECB) finally unleashed the much-needed liquidity sought by Europe's troubled banking sector. As a result, banks, particularly in the peripheral nations, used cheap funds to buy up their own sovereign debt, effectively betting on recovery. This, coupled with reasonable progress on economic reform in Spain and Italy, restored risk appetite and confidence from their extreme lows.

In contrast to last year, the number of central banks in easing mode has increased. A number of emerging-market central banks have joined the fray, notably the People's Bank of China. We think risk assets will continue to be reasonably well supported for as long as this trend persists.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

However, after a strong and almost uninterrupted rally since the first ECB liquidity injection, equity markets are due a pause for breath. It is becoming more difficult to find value and we are starting to see some fairly muted share-price reactions, even when companies post decent results.

Indeed, given the recent substantial outperformance of cyclicals, there is a case for reducing exposure here and rotating back to more defensive areas. Caution is required in the financial sector in particular. Recent ECB activity may have allayed some of the shorter-term liquidity concerns, but the longer-term headwinds of regulation, profitability and deleveraging remain. Recent movements in the oil price are also unwelcome a continued rise has the potential to inflict real damage on a recovering global economy.

Overall, investors should realise that Europe isn't out of the woods. The forces at work in the sovereign bond market are especially troubling and investors need to tread very carefully. In Britain, for example, the Bank of England nowholds around 30% of outstanding gilts.

This, combined with regulations forcing certain financial institutions to hold gilts despite low yields, has resulted in some fairly deep market distortions. In such a challenging investment environment, investors should seek well-positioned stocks that offer decent value.

Centrica (LSE: CNA), the owner of British Gas, has underperformed both the sector and wider market over the past 12 months and now looks good value. Recent results were reassuring, given the recent concerns about a margin squeeze and the impact of a comparatively warm winter. The stock also boasts an attractive and growing dividend.

Senior (LSE: SNR) is a stock that has had a very good run since we first started buying it. Following strong recent results, it continues to offer good value. The firm is a high-tech manufacturer operating mainly in the aerospace and automotive sectors.

While the second of these is arguably less visible, the record order books at its largest civil aerospace clients, Boeing and Airbus, offer a high degree of comfort. It has a healthy balance sheet and is well placed to make strategic acquisitions.

Advanced Medical Solutions (LSE: AMS), the Aim-listed wound care and sealant specialist, offers investors exciting growth prospects, given its strong product portfolio and widening geographic reach. Recent shrewd takeovers have complemented its product portfolio and we look forward to continued progress in new markets, particularly in America.