Three out-of-favour firms

Many of the companies professional investor Paras Anand likes are out of step - or out of favour - with the broader market. But being out of favour doesn't mean they are poor businesses. Here, he picks three firms that the market has shunned, but which should generate decent growth in the years to come.

Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Paras Anand, fund manager at the F&C European Growth & Income Fund.

We've had a broadly positive view of the markets in general over the last year or so. The main reason is our belief that the economy has the ability to recover, driven largely by corporate investment. Corporate balance sheets look robust and mergers and acquisitions activity has underpinned valuations. Towards the back end of last year, additional monetary stimulus added fuel to the fire. In these circumstances, lower-quality businesses and assets tend to get pushed fastest and furthest. While we remain positive on a medium-term view, many of the companies we like are out of step, or out of favour, with the broader market.

Over the medium term, we believe that businesses with prospects for growth, driven by structural rather than cyclical trends, and which can build on their dominant positions to take market share, are very well positioned. We are still positive on certain parts of the market, but less so on others. On balance, the current wave of corporate activity will support valuations, but the headwinds of rising capital costs may mean that in the short term the market could struggle to make meaningful progress. A pause is possible after a roughly 65% rise from the March 2009 low.

One of our long-term favourites is Glanbia (LSE:GLB), an Irish-domiciled dairy products business and the second-largest global manufacturer of cheese. The business has evolved into areas with more fundamentally attractive growth prospects and higher profitability. They produce infant formula, sports and personal nutrition and processed cheese for quick-service restaurants, in addition to offering products that cater to the changing tastes in developing markets. They have a good history of capital allocation that should generate decent earnings and cash flow over many years.

Second, we like Unilever (LSE:ULVR). This is one of the world's largest providers of food, personal care and home-care products, with a vast global reach through well-known brand names such as Dove, Hellmann's, Persil and Ben & Jerry's. In recent years, the executive management team have fundamentally improved the company's returns, following a reduction of central overheads. The company continues to expand globally, retaining market share in the developed markets while simultaneously growing sales in the emerging-market regions. Over the medium term, we see Unilever adding sales growth and demonstrating the ability to take share from weaker players who face cost headwinds in the current market.

Finally, we like Akzo Nobel (AMS:AKZA), the world's largest manufacturer of decorative paint and performance coatings for personal and industrial use, and speciality chemicals. We believe the firm can still gain synergies from the acquisition of ICI's paints business in 2008. Furthermore, the economics of paint are attractive, offering pricing power and a high return on capital, but with low capital employed. Our analysis suggests that even if house prices remain low and housing transactions don't pick up, the market for repair, maintenance and general improvements tends to be more robust. With nearly 75% of its earnings derived from decorative and performance coatings, Akzo Nobel is a clear leading brand in this particular area. We expect the firm to continue to enjoy high returns, solid growth prospects and strong cash generation.

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