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.
19 Feb 2021
Get decades of growth at a discount with this healthcare investment trust
Investment trusts

Get decades of growth at a discount with this healthcare investment trust

Healthcare is set for strong long-term expansion but looks cheap. That makes this investment trust worth buying, says Max King.
19 Apr 2021
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.
16 Apr 2021
Four investment trusts for income investors to buy now
Investment trusts

Four investment trusts for income investors to buy now

Some high-yielding listed lending funds have come through the crisis with flying colours. David Stevenson picks four of the best.
12 Apr 2021

Most Popular

Lab-grown meat: how “moo’s law” will drive innovation
Soft commodities

Lab-grown meat: how “moo’s law” will drive innovation

Jim Mellon and Anthony Chow, co-founders of Aim-listed Agronomics, explain why they believe that “cellular agriculture” will benefit from massive long…
16 Apr 2021
The bitcoin bubble will burst: here’s how to play it
Bitcoin

The bitcoin bubble will burst: here’s how to play it

The cryptocurrency’s price has soared far beyond its fundamentals, says Matthew Partridge. Here, he looks at how to short bitcoin.
12 Apr 2021
Lab-grown meat: the new agricultural revolution
Soft commodities

Lab-grown meat: the new agricultural revolution

Vegan alternatives are taking off, but the future of food technology lies in lab-grown meat – cultivating steaks and burgers from animal cells, says A…
16 Apr 2021