Follow the leaders to success

Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Craig Yeaman, fund manager, Saracen Growth Fund.

I take a long-term approach to investment. This may seem odd in a market preoccupied with daily updates and quarterly results. But at Saracen, we have never tried to call markets or share prices on a short-term basis. Instead, we try to identify companies that will outperform over a sensible timescale.

I often hold stocks for five years or more, so it is crucial to carry out robust due diligence to identify tomorrow’s winners. The fundamentals I look for are: market leading positions; expansion plans that can be self-funded; unique assets; sustainable margins and growing dividends. It is unlikely that any company will tick every box, but it is possible to find stocks that have at least two of these attributes.

Card Factory (LSE: CARD) is the UK’s leading specialist retailer of greeting cards and related gift items. The company opened its first store in 1997 and has grown to more than 800 stores at present. Its market share has increased from 2% in 2004 to about 19% now. The firm has a long-term target of 1,200 stores, both in the UK and Republic of Ireland, and is rolling out 50 stores a year.

Card Factory has sector-leading operating margins of 22%, due primarily to its vertically integrated model (ie, it owns its supply chain). More than 98% of all single cards sold by the group are designed in-house and it prints, finishes and packages nearly all of the non-handcrafted cards it sells. The business has a strong balance sheet and is highly cash-generative. A special dividend has already been paid to shareholders (the company only listed in June 2014) and we believe further returns of cash are likely in due course.

Victrex (LSE: VCT) is a world leader in high-performance materials, serving a diverse range of markets. Millions of people rely on products or applications that contain the company’s thermoplastic polymers (plastics), from smartphones, aeroplanes and cars to medical devices. The company targets strategic markets that offer both high volume and high margin opportunities. A large growth area is the transport sector, where fuel efficiency and reductions in carbon emissions are critical.

Weight reduction is imperative in new aeroplanes to help reduce fuel costs and the company’s materials are specified on several of the world’s leading aircraft platforms. Another exciting area of growth relates to the medical market. An ageing global population and demand to replace worn out body parts means more durable materials are required. Operating margins are consistently stable at 40% and the business is also extremely cash-generative. It is likely special dividends will also feature very prominently in future years.

Restore (LSE: RST) is one of the UK’s leading providers of records management and related office services. Records management, its core activity, is characterised by high levels of recurring revenue, attractive margins and long-term customer relationships. By revenue, the firm is the second-largest in the UK in records management and first in office relocations and ancillary services, such as shredding, scanning and IT equipment disposal.

The main profit generator is records management, which contributes more than 80% of group operating profit. Major clients include household names from the legal, insurance and pharmaceutical worlds, together with the Crown Estate. We expect dividend growth of 20% for each of the next five years and the shares trade on a forward price-earnings (p/e) ratio of just over 13 times, offering good long-term value.