Seeking out solid stocks in stormy times

Each week, a professional investor tells us where he’d put his money. This week: John Goodall, research analyst at WH Ireland, selects three reliable and cheap shares.

Equity markets in the developed world rebounded in the second quarter, leaving the FTSE 100 broadly flat for the year to date. Investors will have benefited from dividend yields, which have added around 2.4% to the index’s performance. Emerging markets, however, have struggled owing to a strong US dollar, which has reduced liquidity and hampered lending.

The Chinese equity market has reached a three-year low amid fears of a trade war. Amid this uncertain backdrop, investors should concentrate on companies with solid track records and prospects that are trading at attractive valuations. The following firms offer capital preservation, growth and income. 

A solid dividend grower

Diploma (LSE: DPLM) is a high-quality niche distributor of technical components, operating in life sciences, seals and controls. It provides products in high-growth sectors that are indispensable to customers, while aftermarket services such as repair and maintenance foster customer loyalty. It has a strong track record: dividend and free cashflow growth have compounded at around 13% a year over the last decade.

Selective bolt-on acquisitions, funded almost entirely by free cashflow, have also enabled Diploma to grow. Over the last three years, the group has invested £90m in takeovers, contributing to over £70m of group revenues in 2017, 15% of the overall figure. With a “terminal” growth rate (the estimated potential annual rate over the extremely long term) priced into the current valuation, compared with a current underlying growth of 7%, we believe there is scope for further upside. 

A discounted real-estate play

We see value in British Land (LSE: BLND), which trades at an unwarranted 35% discount to net asset value (NAV). Retail property, which accounts for half of group assets, is undergoing a period of structural change with online competition threatening the traditional high street.

British Land is well placed, however, having sold £2.3bn of retail property in four years to focus on quality, well-located assets and those with mixed-use potential. This is paying off. Over the last two years, its assets have significantly outperformed in terms of footfall and sales. Moreover, the sector’s development plans for London offices have been scaled back recently, but British Land has benefited from the lower supply as it has kept investing. The overall portfolio is also well placed to benefit from Crossrail, given that 35% of assets (£4.6bn) are near its stations.

Buy in before a break-up

Whitbread (LSE: WTB) has said it will demerge Costa within the next two years. Premier Inn and Costa are deemed better long-term prospects as separate businesses. We see upside in the current valuation of the single entity. In the UK, Costa has doubled outlets in the last six years to over 2,400. Growth has been complemented by the rollout of Costa Express machines. Future growth will be driven by the overseas business.

Premier Inn keeps expanding in the UK and is aiming for 85,000 hotel rooms by 2020. It launched in Germany in 2016 and intends to operate 31 hotels across 15 cities by 2021. Earnings per share of around 300p looks achievable by 2020, making the shares good value for long-term investors.