Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: James Lowen, fund manager, JOHCM UK Equity Income.
Stockmarkets had an eventful run-up to Christmas and New Year. They were spooked by a tumbling oil price, trouble in Russia, and political rumblings in Greece, before staging something of a rally towards the end of 2014.
However, company valuations, especially those of stocks dependent on Western consumers, already looked reasonable in most parts of the UK market before December's ups and downs. If you're prepared to look beyond this year-end turbulence, they look even more attractive now.
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Marshalls (LSE: MSLH) is the market leader in outdoor paving and street furniture in the UK. In the last year, a strong recovery has seen its profit growth trounce City expectations.
Its balance sheet has been boosted, and the new management team has laid out a plan to increase its activity across the UK, where many of its smaller rivals shut down during the recession, and larger ones have underinvested. That makes Marshalls the only firm in this sector on the front foot and able to take advantage of the UK recovery.
Marshalls also has fast-growing, well-positioned businesses outside the UK mainly in Europe, but also in exporting high-quality stone to America. Analysts always underestimate the extent of a recovery and also of the operational gearing a company like Marshalls will enjoy as sales grow.
If the company was valued at 12 times our forecast for its 2016/2017 earnings per share, the share price would have to rise by around 40% over the next 18 months.
NewRiver Retail (LSE: NRR) is a specialist property company. It focuses on UK regional shopping centres, particularly those hosting discount stores such as Primark. It has limited exposure to property run by the big four supermarkets which we think is overpriced, given the issues plaguing the sector.
The yields on the properties NewRiver owns remain high even though occupancy levels are also high and rents are low. These yields, which have started falling as the price of commercial property has risen, should continue to fall over the next12 to 18 months, driving the net asset value up.
At 6%, the stock has one of the highest dividend yields in the sector. That's partly down to the high yield on property right now, but it's also due to the firm's efficient cost structure.
The management team is creative, which adds another layer of value for example, NewRiver bought a pub portfolio from Marstons, which it is now busy turning into convenience stores for the Co-operative Group.
Packaging group DS Smith (LSE: SMDS) has been one of our core holdings for some time. An innovative approach has made it the packaging provider of choice for many of the world's biggest consumer-goods companies.
The changing nature of food retailing (from hypermarkets to discounters, online and convenience stores) and greater use of the internet in general, means packaging needs are changing.
Customers now come to DS Smith because of its lighter, lower-cost packaging and its ability to cut customers' overall costs. Also, Sweden's SCA Packaging was one of the best acquisitions we've ever seen from a valuation perspective, and it has been integrated far more smoothly than original forecasts suggested in terms of profit delivery.
We expect management to continue to consolidate the European packaging market over the next two to three years, and also to take market share organically, both of which will drive the share price higher. The stock is on a modest price/earnings ratio of 11-12 and yields 4%.
