How to find tomorrow’s winning stocks today

Professional investor Colin McLean of SVM Asset Management highlights picks eight promising stocks for investors to buy for the long term.

Where can tomorrow’s industries be found on the stockmarket? Today’s sectors represent past success; future consumers’ needs will be met by new technology and business structures. Some of these emerging areas will already be listed on the stockmarket, but typically in small and medium-sized firms that are easily overlooked. For some, the edge is in technology, but more often change comes from disruptive business models using capital differently, or offering innovative customer services.

Once a few businesses have listed in a subsector, analyst research and interest from investors gradually builds up. It becomes easier to see a pattern to the change. Then each additional listing adds credibility to the subsector. This can lead to a re-rating as investors gain a clearer picture of the new business models and growth prospects. Interesting areas include challenger banks, student accommodation and legal services. In each sector a competitive edge allows the new businesses to disrupt the incumbents.

Shaking up lazy lawyers

The cosy world of legal services is finally changing following the creation of limited liability companies in 2012. Greater specialisation has been forced on all but the largest law firms. Moreover, because long-running court cases can prove extremely expensive, capital raising for legal cases has now become a specialist activity in its own right.

All these changes have spawned new businesses, such as Burford Capital (Aim: BUR), Manolete Partners (Aim: MANO), Keystone Law Group (Aim: KEYS) and Knights Group Holdings (Aim: KGH). Keystone and Knights are growing organically and by acquisition. Burford focuses on financing major US cases, where litigation can take years. Manolete addresses the need for company administrators to value claims. It has identified opportunities in pursuing claims against companies and their directors.

Student housing is a growth area

The property sector includes a number of specialist niches, such as student accommodation. Students now demand a high-quality overall university experience, and to provide this universities must work in close partnership with developers and managers of student accommodation. Investing institutions, including overseas pension funds, find the long-term nature and stable occupancy of these properties attractive. Listed companies in this sector include Unite Group (LSE: UTG)and Watkin Jones (Aim: WJG). Watkin Jones is also diversifying into providing private rented accommodation for young people as they move into work.

Bank on new banks

Investors may be more familiar with challenger banks, which have been encouraged since the financial crisis to bring competition into the banking sector. Their narrow focus on specific types of lending facilitates efficient operation and use of equity. The challengers are usually unencumbered by the legacy branch networks of the older banks. Each of these new banks operates a different business model, but all are innovating. The proposed combination of OneSavings Bank (LSE: OSB) and Charter Court Financial Services Group (LSE: CCFS) should create a stronger challenger and interest institutional investors.