A professional investor tells MoneyWeek where he'd put his money now. This week: Francis Brooke, investment director, Troy Asset Management
At Troy we aim to generate consistent absolute returns by placing a strong emphasis on capital preservation and, particularly in the Trojan Income Fund, the generation of a reliable stream of income which beats inflation. We regard excessive stock turnover as a tax on investors' returns, so when I add a holding to the concentrated portfolio of just over forty stocks, it is for the long term. The stocks I recommended in this column in December 2004 (Air Partner, Davis Service and Unilever) and in October 2005 (Reynolds American and Diageo) remain in the fund, despite having risen by between 26% (Diageo) and 208% (Air Partner) since purchase. Sales are made only when we feel the share price more than discounts future prospects, or if we lose confidence in a firm's strategy or management.
The flattening of yields across the equity market has reduced investment opportunities for income funds in the utility and consumer goods sectors, where takeover bids and speculation have driven up valuations. But as these traditionally defensive investments have become more expensive, so some firms once seen as growth stocks have been de-rated as investors lose interest in those whose growth rates no longer fizz as they once did. As usual, the market can overshoot in these situations and become too pessimistic.
Sage (SGE) has a vast global franchise providing business software and services to 5.2 million customers. Growth forecasts have slid since the peak of the IT boom, but we believe the market is now underestimating future growth. That means Sage's p/e ratio of 16 for the year to September 2008 is a great opportunity to buy into this very well-run business. With a strong balance sheet and high level of dividend cover (3.5 times), the dividend growth rate should accelerate faster than earnings, making it worth buying, despite its relatively low yield. With a broad customer base and a growing level of higher-margin recurring service revenues, Sage should enjoy a considerable re-rating.
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Experian (EXPN) is another undervalued business. Since splitting from Great Universal Stores last October, the shares have tracked sideways, even though, before the listing took place, GUS turned down a private-equity bid for the group at a significant premium to its current price. Experian has a unique franchise in the credit checking and retail data management industry. Recent sector deals in the US have been for much higher valuations than Experian currently commands. As with Sage, this is a cash-generative business with excellent long-term dividend growth potential, justifying its reasonably high p/e of 19.
My third recommendation is Delta (DLTA). The company comprises a number of industrial divisions in Australia (steel products and galvanising services) and South Africa (manganese materials), supplying construction, mining and battery industries. These represent the rump of a larger manufacturing business whose UK units have been closed or sold. As a result, Delta's pension fund, although well funded, is larger than the firm itself with liabilities of £667m, compared to a market capitalisation of just under £200m. The shares yield 3.5%, while the dividend is 2.5 times covered and there is net cash of £100m on the balance sheet.
Delta is a good example of an investment that requires patience, but the yield and strong balance sheet should provide support in the meantime.
The stocks Francis Brooke likes
12mth high 12mth low Now
Sage 279.5p 202.8p 260.5p
Experian 637p 558p 617p
Delta 161.5p 115.5p 131p
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