Professional investor Catherine Stanley has a cautious outlook on Britain's economy. But she still believes there is long-term value in the UK market. Here, she picks three attractively-valued stocks that should be able to ride the bumpy road to recovery.
Each week, a professional investor tells MoneyWeek where they'd put their money now. This week: Catherine Stanley, manager of the F&C Stewardship Growth fund.
We remain cautious on the outlook for the UK economy and expect strain on public and consumer spending due to the high level of government debt and the inevitable tax increases that will feed through next year.
Yet there is long-term value in the UK market even after the recent rally, which has seen small and mid-caps outperforming as they are the most geared for recovery. Although it's too early to call the end of the recession, there are signs the market is looking to the upturn.
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We expect more merger and acquisition activity and fund raisings to continue as firms look to refinance their balance sheets. While rights issues are currently taking a lot of available cash out of the market, once this abates it will be easier for the market to perform. It will be a bumpy ride, but there are opportunities to buy attractively valued companies.
The first stock I like is Pace (LSE: PIC), a leading developer of set-top boxes (STBs) for receiving digital satellite, digital cable and internet television. New technologies introduced by the company guaranteed its entry into the US market a few years ago and the successful integration of Philips' STB business, following 2008's acquisition, has strengthened Pace's position. Globally, Pace is now the third-biggest STB maker, just behind rivals such as Thomson and Motorola partly due to consistently being first to the market with new innovations. Structural and business drivers, such as the switch from analogue to digital TV, look robust. Despite significant upgrades leading to share-price growth in the last year, the stock still doesn't look expensive.
Second is Galliford Try (LSE: GFRD), a house builder and construction firm. The company was treated as a house builder in the falling markets, leading to a share-price collapse. But aggressive deleveraging of its house building business on the way down, much earlier than other house builders, strengthened its balance sheet and placed it in a position to buy land again where most are not yet able to do the same. The construction business is also significantly biased towards the public sector and regulated industries. While we anticipate cuts in public spending, regulated industry spend should remain strong and forecasts are conservative. The market hasn't re-rated Galliford Try in the same way as other house builders, so it looks well-positioned to benefit in both share price and trading terms.
Lastly, I like Connaught (LSE: CNT), a defensive growth stock that has underperformed recently and now trades on a historically low valuation, while delivering very strong growth. A large part of its business is maintenance of affordable housing, where repairs are always needed. Most of this is not discretionary spend, and funded out of rent roll rather than government spend, making Connaught pretty resilient. It has started to branch out into other areas, such as a recent deal with the Unite union to maintain student accommodation, as well as work in the defence sector, offering possible avenues for extra future growth.
The other part to the business is health and safety compliance (annual checks on fire safety equipment, boilers, etc), which is regulation-driven. This is a recurring business model and margins have grown quite strongly under Connaught's management, offering confidence that it can maintain its long-term growth rate.
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