A professional investor tells us where he'd put his money. This week: Richard Penny of the Crux UK Special Situations Fund picks three favourites.
Despite the intense uncertainty created by Brexit, the UK stockmarket still offers opportunities for long-term capital growth. The volatility in global markets over the past few months has had the greatest impact on growth shares, notably some of the UK's best and most expensively-valued companies. We seek out high-quality businesses that boast low levels of debt and strong management teams. Now some of the promising growth stocks that fit the bill have been unjustly marked down or are being overlooked by rattled investors. Here are three "hidden growth" stocks.
Prudential's Asian motor
Sometimes highly successful and fast-growing businesses are tucked away in larger companies. As a result, the overall entity can trade at a discount to its underlying value. For instance, Prudential's (LSE: PRU) Asian subsidiary, its largest in terms of operating profit, is not exactly a secret and the shares have been good performers over recent years.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Nonetheless, analysts estimate that Prudential's shares trade below the sum of its parts. Valuing Prudential's Asian operation in a similar way to AIA, Asia's biggest listed life insurer, implies plenty of upside.
Recent emerging-market problems have overshadowed Prudential's long-term prospects. Next month the company will showcase its Asian division to analysts, which may trigger a reappraisal of the stock. Next year's split of the overall business into two entities one serving the UK and Europe, and the other Asia, the US and Africa may also prove to be a catalyst for a share price rise.
The right kind of takeover
Buying growth can often be dangerous for companies Around two-thirds of deals reduce the value of the acquirer. Often management teams overpay for assets because they focus on building scale rather than creating wealth for shareholders. However, we think oil and gas producer Jadestone Energy's (LSE: JSE) takeover of Montara, a management-founded business in Australia, is the right kind of acquisition.
Montara, an orphan asset sitting in a large company, was bought for a knock-down price. Following the transaction, the oil price has risen. We think management, with its previous record of operating and improving oil and gas assets, can boost performance, so there is ample upside for shareholders.
Alpha takes on the "big four"
A Goldilocks approach to growth investments is the right one: not too early and not too late. We don't want to invest when a firm is so young it has yet to establish itself, but on the other hand we don't want to wait so long that its growth opportunities have dried up or the stock market has fully priced in its potential.
A good example is Alpha FMC (LSE: ATM), a consultant to the fund-management industry, which has an admirable track record of organic growth. It targets the best employees of PWC and Accenture. With no expensive sales partners or graduate recruits, Alpha is a lean outfit with high productivity per employee. With only 350 consultants compared to 500,000 at the "big four" rivals, it has plenty of room for growth.
Richard Penny has been managing the Crux UK Special Situations Fund for the past five years. Prior to this, he spent 15 years as a Senior Fund Manager at Legal & General Investment Management (LGIM) where he managed the award-winning L&G UK Alpha Trust and L&G UK Special Situations Trust In June 2021, Richard got awarded a AAA rating from Citywire. Richard studied Engineering and Economics at the University of Oxford and he now shares his expert knowledge on shares in our MoneyWeek share tips.
December 2023 NS&I Premium Bond winners - check now to see what you’ve won
If you hold money in NS&I Premium Bonds, you can check from today (2 December) to see if you have won in the December prize draw. Here’s how to check.
By Vaishali Varu Published
OpenAI – corporate drama unleashed
OpenAI, the firm behind ChatGPT, was in uproar as its boss was booted out, briefly snapped up by Microsoft and then brought back again.
By Dr Matthew Partridge Published