Tom Carroll, manager of the Schroder UK Select Growth fund tells MoneyWeek where he'd put his money now.
Investors are worried about a global economic slowdown in 2005. I believe these concerns are overdone. I agree that growth will slow from the current high rate, but only to more normal' levels. But whatever the economic backdrop, there are opportunities for companies involved in longer-term secular or structural trends because demographic, industrial, technological and regulatory changes are separate from the shorter-term economic cycle. The best firms operating in these areas will be able to deliver growth ahead of the average.
When considering investing in growth, technology springs to mind. Tech stocks made huge gains in the late 1990s as investors tried to cash in on the new economy'. However, although they definitely identified a trend, they made the mistake of buying indiscriminately, failing to pick out the good companies from the bad. Investors were also willing to pay any price.
In contrast, I look for companies that are part of a growing trend, but I buy only at the right price, and only if I am convinced that they have the strong market position needed to turn a growth advantage. There must also be sufficient barriers to entry that enable the company to increase its market share. Look too at the returns made on the capital invested in the business - if these are significantly higher than the costs, it suggests the company is well managed and has the ability to sustain growth. If these strengths are not yet reflected in the stock's price, it is worth investing.
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So what are the growth areas and the best companies operating in them? As a growth investor, many people assume that technology stocks will play a large part in my portfolio.I only invest, however, where the returns will come through on a two to three-year view and where the returns implied by the market are too low. Patientline (PTL) - a provider of in-hospital telephone and entertainment systems and technology for recording bedside information for medical staff - has a dominant position in the UK and trials in the US are proving interesting. The market is forecasting almost 50% growth in sales over the coming years, but is pricing the shares on a 7% return on capital. I believe returns will be much greater.
China, now a significant exporter and importer of goods, is clearly a long-term growth area. One consequence is that traffic through P&O's (PO/) ports in Asia is growing rapidly. The firm's shares are on a low rating because the market has focused on P&O's underperforming ferries division while overlooking the potential of other divisions. This shouldn't last. Another beneficiary of rising cross-regional trade should be Intertek (ITRK). Firms are increasingly outsourcing their product testing to ensure that their products meet the safety and quality regulations in the markets where they are sold, and Intertek has a worldwide network of testing facilities. Its shares have performed well over the last 18 months, but I expect to see earnings further upgraded.
Finally, I'd look at McCarthy & Stone (MCTY). Many investors are selling housebuilders on concern that the property market will collapse. But McCarthy and Stone is different because it builds sheltered housing for a rapidly growing area: the retirement market. The current share price implies a 7% return on capital, far below the 12% expected next year. The company also has a very strong balance sheet, a decent land bank and a unique market position.
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