How to find a bargain in the British market

Richard Penny of the FP CRUX UK Special Situations Fund chooses three top-quality stocks.

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.

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.

Recommended

Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
17 Jan 2020
Share tips: eight stocks that should deliver robust returns
Share tips

Share tips: eight stocks that should deliver robust returns

Ryan Ermey of US publication Kiplinger’s Personal Finance chooses his favourite stocks for the next decade, which should be able to grow for years.
28 Dec 2019
Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
20 Dec 2019
Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
13 Dec 2019

Most Popular

Why commodities could be the best investment for 2021
Commodities

Why commodities could be the best investment for 2021

There’s plenty for investors to worry about right now. But things will inevitably recover. And the sector most likely to do best when they do, says Jo…
22 Oct 2020
Negative interest rates and the end of free bank accounts
Bank accounts

Negative interest rates and the end of free bank accounts

Negative interest rates are likely to mean the introduction of fees for current accounts and other banking products. But that might make the UK bankin…
19 Oct 2020
Buying bitcoin could be the best way to play the remote working boom
Bitcoin

Buying bitcoin could be the best way to play the remote working boom

The coronavirus pandemic has accelerated the move to home working, flexible employment practices and the rise of the “digital nomad”. One of the best …
21 Oct 2020