Each week, a professional investor tells us where he'd put his money. This week: Richard Penny of the FP CRUX UK Special Situations Fund chooses three top-quality stocks.
Investment is often characterised as a trade-off between value and growth. However, this is not the case. Growth is a feature of a business, and value is a reflection of what you pay for shares in relation to their inherent qualities. It is possible for a low-growth company to be expensive, while growing companies can also be acquired cheaply. Investors are always on the hunt for a "bargain": high-quality growth at an attractive valuation.
When it comes to finding these, we consider key factors to be an ability to generate cash, management demonstrating alignment with shareholders' interests by investing in the business, and the sustainability of growth and returns. Smaller businesses often display these characteristics, and because institutional investors tend to ignore them they can trade at big discounts to larger peers.
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Sometimes a business that would be highly valued as a standalone business is tucked away inside a large global entity. Bargains also arise when a company looking to grow depresses current profits by investing in new areas, prompting investors to mark it down, thus masking its true value.
Analysing the reasons why a seemingly high-quality company has a downtrodden valuation is important. By tuning out market noise and taking a long-term view, you will greatly improve your odds of finding a bargain in the UK market.
A leader in healthcare
MaxCyte (Aim: MXCT)
Unlocking value at the Pru
Prudential (LSE: PRU)
Grappling with complex dataFirst Derivatives (Aim: FDP), a UK-based IT service management company, looks well placed to benefit from the growing demand for products that can handle and process complex data quickly. Its database product, Kx Systems, is the fastest in existence and plays an integral role in complex financial-trading systems. The group's margins of 20% have been depressed, but this has been due to fresh investments rather than slowing sales.
Similar businesses in America trade at far higher prices and in our opinion First Derivatives, having been hit disproportionately in recent market sell-offs, is currently undervalued.
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.
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