The best firms to own during market turmoil
A professional investor tells us where he’d put his money. This week: Will Dobbs of Charles Stanley picks firms with predictable returns in high-growth industries.
In an uncertain world, consistency pays off. Our approach is to seek companies with predictable returns in high-growth industries, as this is often the best way to compound growth over the long term and take comfort in times of market stress. We all know markets are volatile, so understanding the businesses in which we invest and believing the long-term story is important. We highlight firms with above-average growth prospects, sustainable and diversified earnings, high returns on capital and not too much cyclicality.
Investors have a lot to contend with at the moment valuations in many cases are approaching all-time highs, interest rates are generally rising (albeit slowly), we are potentially entering a tit-for-tat trade war, and every week we seem to hear about another sector that is being destroyed by Amazon (this week it's high-street retail).
On the positive side, though, markets seem to be navigating these potential banana skins with a certain nonchalance, so long as expectations are being met or beaten. In any case, the evidence suggests that, if we really are in the final throes of the bull run, this is the point at which shareholders can make some of their best returns. However, the amount of mergers and acquisitions (M&A) going on suggests that companies still believe there is value out there.
Exceptional return on capital
Halma (LSE: HLMA), which recently joined the FTSE 100, is a leading safety, health and environmental technology group. These are all areas growing more rapidly than the wider economy. The management team capitalises on these markets by buying companies that operate in small niches and allowing them to remain entrepreneurial and independent-minded. Halma consistently maintains exceptional returns on capital, and has grown its dividend by 5% or more for 39 years running. The shares are highly priced right now, but treat any pull-back as an opportunity to invest for the long term.
Faster growth than peers
West Country-based AB Dynamics (LSE: ABDP) offers exposure to advanced testing systems for the automotive industry. The £220m market-cap company makes simulators and robots that drive cars (enabling engineers to control for the variability in human performance when working on new designs), among other things. This week the group achieved a key commercial milestone and received its first order for an advanced vehicle-driving simulator from China. Research and development spending in this sector remains high, but AB Dynamics achieves better margins and has enjoyed faster growth than its peers.
DiscoverIE (LSE: DSCV) makes customised electronics for everything from wind turbines to refrigeration vans and electric stair-lifts. The company is a conglomerate of many small, niche businesses that collectively generate strong organic growth, high returns on capital and recurring revenues. The management believes there are strong, untapped cross-selling opportunities within the group. In the past five years, revenue and underlying earnings per share have doubled, and the management aims to repeat this in the next five years, with even greater margins.