James Thomson, investment manager of the Rathbone Global Opportunities fund tells MoneyWeek where he'd put his money now.
"If all the economists were laid end to end, they'd never reach a conclusion." George Bernard Shaw's pronouncement embodies the problem with economic forecasts we might know what goes into them, but we don't know what the combination will produce.
Another challenge presented by the economic recipe is that economic and stockmarket performance often diverge. For example, China's economy grew 9.5% in the first half of year, but the country stockmarket performed badly.
I aim to identify stocks that are able to weather economic cycles. Their fate should not hinge on hitting the economic sweet spot instead I want them to be able to grow through the economic cycle. The business model is the first thing I look at: I want it to be scaleable, defensible and exposed to as few operational risks as possible. Reasonable valuation is of equal importance.
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Look at online auction site Ebay. It has a fantastic business model, but its very high valuation already reflects widespread understanding of its business model and growth rate; there is simply no room for manoeuvre. I shy away from these kinds of highly valued stocks, and also from companies that are not forecast to make a profit for a number of years avoiding the losers is an equally important part of the job.
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A theme I identified in early 2004 is that of online gaming. The internet allows casino operators to reach out to every corner of the globe without substantially increasing costs.
A favourite stock of mine in the sector is Fun Technologies (FUN:LSE), which focuses on skill-based games such as dominoes and pays out cash jackpots. The company benefits from the growing interest in online gaming from investors and punters alike, but unlike poker and casino networks is not in legal limbo. Fun Technologies also earns a steady cash flow from one of its subsidiaries, Don Best, which provides odds on various sporting events for gambling companies worldwide.
We bought Fun Technologies known then as CES Software on float. Since then the stock has almost tripled, but I believe there is still considerable upside and have recently added to the position.
Resin Systems Corporation (RS:TSXV) is a more recent buy (February 2005). This Canadian company has developed a composite plastic-like resin, which is used instead of wood or steel to make utility poles. The resin is stronger, lighter, greener' and, more importantly, cheaper than its standard counterpart, so should see good demand.
I added Rowan Companies (RDC:NYSE) to my portfolio in April of this year. The business operates a fleet of offshore drilling rigs, most of which are based in the Gulf of Mexico. A higher oil price, a strong demand for rigs, finite supply and manageable new capacity coming on stream have colluded to push up day rates, and that should support growth.
Finally, homeland security is an interesting sector. We first researched this theme after September 11th 2001, and there are several ways to play it. My latest holding is American Science and Engineering (ASEI:Nasdaq), which specialises in safe X-ray systems that can uncover hidden weapons and explosives. Recently, the company has received a grant from the US Transportation Security Administration to develop technologies to scan airline passengers for contraband that may not ordinarily set off a traditional metal detector.
