Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Philip Rodrigs, fund manager, River & Mercantile UK Dynamic Equity Fund.
Volatility is on the rise, after years of being suppressed. So far this year we’ve seen dramatic moves by leading stock indices and large companies, resulting in lots of comment in the press about appropriate asset allocation during such turmoil. However, this mainly focuses on the “beta” of the markets (which asset classes to invest in, rather than individual stocks).
In fact, volatility presents the best opportunities for those focusing on “alpha” – sharp moves in markets can present good chances to buy into specific stocks. Volatility is an active manager’s friend – it helps us build portfolios that can significantly outperform steadily over the long term – and to take advantage, we have launched the all-cap R&M UK Dynamic Equity Fund, which invests across the whole UK stockmarket. We use our “potential, valuation and timing” approach to select the best growth, high-quality, recovery, and asset-backed stocks for the portfolio.
I first invested in Paysafe Group (LSE: PAYS) when it had a £50m market cap in 2011. I am just as excited about its prospects now that it has a near-£2bn market cap. Its valuation remains cheap, due to a business strategy that is still delivering strong growth and positive surprises. During 2015, Optimal Payments acquired Skrill to create a global online payments business with the ability to rival PayPal. It was renamed Paysafe.
Riding the long-term growth of online retailing, Paysafe specialises in complex multi-region and multi-method payments, and helps emerging and growing retailers with advanced fraud detection. Remarkably, despite the share price performance, Paysafe remains cheaper than its peers and cheap relative to its strong growth and cash generation credentials. This is due to the firm only recently breaching the £1bn mark, which means many investors are only just getting to know the company. I’m sure they will like what they find.
Another overlooked stock is Equiniti (LSE: EQN). Many investors will have used its services without realising it – the firm looks after the complex shareholder registers for many FTSE 100 groups. It is a broad, diversified business that operates wherever complex IT systems are needed to handle high volumes of records and transactions – it has plenty of opportunity to help the government automate its paper-based systems.
Yet this solid, steadily growing business is on a price/earnings ratio of just 11. That appears to be due to a difficult start to life on the stockmarket, which rather extraordinarily included it having to buy stock in its own initial public offering. But steady delivery is likely to see it re-rated up to – and perhaps beyond – its peer Capita’s valuation. In the short run, this will be helped by significant transaction fees due to the BG-Royal Dutch merger, which it is administering.
Lastly, we have a former high flyer that is now an exciting recovery opportunity, trading at around a third of its asset value. The new national living wage is both a boon and a burden for pub companies – consumers have more money to spend, but staff need to be paid more.
But for Enterprise Inns (LSE: ETI), which owns freehold pubs and earns rent, only the boon matters. The company held too much debt heading into recession, which has left investors wary. But now Enterprise’s valuers confirm that its asset value offers nearly three-fold upside. With many initiatives to realise value – and helped rather than hindered by the recent wage regulation – Enterprise is a stock that may well be one to toast in years to come.