Four stocks that blend value and growth for healthy capital gains

Good stockpickers should buy both value and growth stocks, says professional investor Chris Garsten. Here, he picks four stocks that combine the best of both.

Each week, a professional investor tells us where he'd put hismoney. This week: Chris Garsten of the WavertonEuropean Capital Growth Fund picks four favourites.

The most common equity investment-style categories are value and growth. Value is based on multiples such as the price/earnings or price/book ratios rising from unjustifiably depressed levels. Growth stocks' earnings grow faster and for longer than the market, so they often trade on high multiples.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

We believe these labels are simplistic and restrictive. Good stockpickers should buy both growth and value stocks based on the manager's assessment of a stock's fundamental appeal. We are capital cycle investors who can invest in both value and growth. We focus on understanding and quantifying the supply and demand balance in an industry. Supply-short industries are generally attractive ones to invest in. Most active fund managers and commentators apply their energies to demand only and are then caught out when supply increases, wrecking prices.

Assessing supply and demand

All industries and companies go through capital cycles, albeit to varying degrees. The duration and severity is dependent on the barriers to entry for new entrants and the behaviour of existing competitors. There are industries (basic steel, for instance) with lower barriers to entry that swing very quickly from excess demand to excess supply.

Advertisement - Article continues below

Others, such as pharmaceuticals, have a capital cycle that can take decades. As companies or industries shift from excess pessimism to consolidation and structural change, big returns are achievable. Generally, these businesses trade at attractive valuations as the market is slow to understand the changing industry dynamics. As profitability improves the increased earnings typically prompt a re-rating of the stock.

Nearly 10% of the Capital Growth portfolio is in industrial gas stocks, split between Air Liquide (Paris: AI) and Linde (NYSE: LIN). Gas has been a very stable industry and is about to become even more so. Earlier this year the industry consolidated from four to three big players as Praxair merged with Linde. Pricing improved and management became more responsive to shareholders. We believe this will be a low-risk, multi-year stockmarket winner.

Cashing in on cash machines

Loomis (Stockholm: LOOM-B) operates in three business segments. Firstly, cash in transit: transporting cash to and from retailers, banks and cash machines. Secondly, cash management services centres where notes and coins are sorted before distribution. Finally, it is also active in higher-value areas such as foreign-exchange cash machines at Norwegian airports, and Safepoint. The latter is like a "reverse ATM": retailers insert money for collection by Loomis. The average monthly price paid per Safepoint is around $450. The key is that while cash usage is flat the stock is attractive on a capital-cycle view as players are leaving the industry faster than cash usage is declining.

Deutsche Post DHL (Frankfurt: DPW) is one of the largest global express freight, logistics, parcel and post companies. It serves a very diverse base of industrial and commercial customers across all regional and intercontinental trade routes. Its strong market position, high IT spend and increasingly efficient network means it is benefiting at the expense of the smaller players.



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

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

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

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


Money Minute Friday 17 January: UK weakness likely to continue

Today's Money Minute previews UK retail sales figures the UK, inflation data from Europe and industrial production from the US.
17 Jan 2020

Currency Corner: how high can the pound go against the euro in 2020?

In the month in which we should finally leave the European Union, Dominic Frisby takes a look at the pound vs the euro and asks just how high sterling…
13 Jan 2020
House prices

UK house prices may be heading for a Boris bounce

The latest survey of estate agents and surveyors from the Royal Institution of Chartered Surveyors is "unambiguously positive" – suggesting house pric…
16 Jan 2020
Share tips

Class acts going cheap: buy into Europe’s best bargains

Value investing appears to be making a comeback, while shares on this side of the Atlantic are more appealing on metrics such as price/earnings ratios…
16 Jan 2020