Four strong growth stocks to buy now
Investors should seek out companies with the potential to grow, says professional stock picker Mike Prentis. Here, he tips four such stocks to add to your portfolio.
Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Mike Prentis, manager, BlackRock Smaller Companies Trust Plc.
Our approach can most simply be described as trying to find firms that have the potential to become much larger over the medium term. Our core holdings include companies such as Oxford Instruments (LSE: OXIG), Aveva Group (LSE: AVV), Victrex (LSE: VCT), Howden Joinery (LSE: HWDN), Senior (LSE: SNR) and Booker (LSE: BOK). We supplement these with smaller holdings that have the potential to grow. Here are some of the firms we believe offer an attractive risk/reward profile and also, in a few cases, good, safe yields.
In the wealth-management sector we like Charles Stanley (LSE: CAY), which has more than £16bn assets under management. Its net cash balances stand at £35m, representing more than 20% of its market capitalisation. It's very operationally geared; it usually does well in a rising stock market, especially if trading volumes also rise.
The firm will shortly launch Charles Stanley Direct, a new low-cost online platform for clients. The shares yield 3.2%, with good scope for dividend growth as profits recover in stronger markets.
Walker Greenbank (LSE: WGB) designs, manufactures and markets wall coverings and furnishing fabrics mainly for the consumer market. Its brands include Harlequin, Morris & Co, Sanderson and Zoffany. Sales and profits have continued to grow, despite headwinds in Europe, with strong growth also returning in America.
Over the last few years debt levels have nearly been eliminated, which could allow the firm to increase dividends at a faster rate in the future. Its market capitalisation is only about 60% of historic annual sales, and the shares trade at ten times current year earnings.
Our third choice is TT Electronics (LSE: TTG), which manufactures electroniccomponents and sensors used mainly in the automotive and aerospace sectors. Most of its products are designed to last as long as the customer specifies, which creates some revenue predictability. Following non-core disposals, it has £45m of net cash, representing more than 15% of its market capitalisation.
Unlike many industrial manufacturers, operating margins are far from peak levels, but management is strong and capable of increasing margins over the next few years. We expect good earnings growth on the back of a global recovery. The shares yield 3.0% with good scope for more.
Avon Rubber (LSE: AVON) has two businesses. It manufactures protection masks used mainly by the military, and milking equipment, especially liners, used by the worldwide dairy industry. The mask business is underpinned by contracts with the US Department of Defence, but Avon has also sourced orders from other governments.
The range is being expanded and the number of applications for the equipment is also widening to include, for instance, fire services. Growth drivers for the dairy business are strong. Avon has a 16% share of the American market and this is growing well. It's also started to supply China and other emerging markets.
Management is confident that it has the best products globally and will continue to gain share. Volatility is always a problem with smaller firms, which is why we suggest investors build a diversified portfolio as protection against a share-price dip in any single investment.