A professional investor tells MoneyWeek where he'd put his money now. This week: Mileen Rash, fund manager, Henderson UK Capital Growth fund: After a strong run, there are several concerns about the direction of markets. In the UK, rising inflation caused an unexpected interest-rate rise in January, with further hikes expected later this year. In the US, weakness in housing and sub-prime lending is likely to have a dampening effect on the economy. Yet despite these headwinds, there are still opportunities to make good returns. I take a contrarian approach and look for stocks that are heavily out of favour, as this is usually where one can find the most upside. I look for mid- or large-cap stocks with a good business model that generate cash and are attractively valued.
One such stock is plant-hire group Ashtead (AHT). The shares have been shunned because of their exposure to US housing; however, the firm is exposed to the non-residential market, which is showing none of the weakness of the residential. Industry consolidation should also mean a less-competitive pricing environment in the future. The valuation is attractive, too: the shares trade on a single-digit p/e ratio and offer a double-digit free cash-flow yield.
I have also been adding to positions in the mining sector, specifically Xstrata (XTA), Rio Tinto (RIO) and Lonmin (LMI). The whole mining sector was sold off indiscriminately at the start of the year as the copper price fell, despite strength in other commodities, such as nickel and platinum. I believe supply and demand dynamics are in favour of above-average long-term commodity prices. Demand for commodities will continue to be supported by China, irrespective of any slowdown in US demand, while supply will struggle to grow in line with demand. The strong cash-flow generation was demonstrated when BHP Billiton announced a $10bn buyback, 10% of its market capitalisation. I don't think these dynamics are reflected in current share prices.
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I also see good value in the oil sector. The fall in the oil price from its peak above $70 in August 2006 to $50 caused widespread weakness, mainly in the mid-cap oil-and-exploration sector. This has created several buying opportunities. Global supply and demand dynamics are still in favour of higher long-term oil prices and the increase in the strategic reserves of oil in the US will only add to this upward pressure. The oil price is now back at $64, but the sector has yet to perform. I believe Dana Petroleum (DNX) is one of the cheapest stocks in the sector. It has several low-risk producing assets, mostly in the North Sea, along with some significant high-impact exploration opportunities. The current share price values the existing producing reserves at $60 a barrel, so the exploration upside is in for free'. Given limited oil-reserve growth and the sector's strong cash generation, I wouldn't be surprised if there was a bout of mergers and acquisition activity, which would obviously be supportive for share prices.
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So what have I been selling to fund these purchases? Several of my long-term holdings have performed very well, reaching prices at which the valuations were no longer compelling. These sales included Barratt Developments, Cattles and Man Group. Given macro uncertainties, there's likely to be short-term volatility in the market. But on a medium-term view, I am happy to hold all the stocks I've mentioned and am likely to add to my holdings during any short-term weakness.
The stocks Mileen Rash likes
12mth high 12mth low Now
Ashtead Group 224.2p 109p 155p
Xstrata 2,845p 1,539.5p 2,666p
Rio Tinto 3,387p 2,320p 3,166p
Lonmin 3,662p 2,190p 3,614p
Dana Petroleum 1,376p 820p 1,124p
