Three stocks for the long term that the market has missed

Professional investor Adam Khanbhai highlights three stocks where he believes the market is missing the broader long-term picture.

In periods of heightened uncertainty, the value of a rigorous and disciplined investment process cannot be overstated. Decisions based on either the fear of missing out or on a “wait and see” approach are unlikely to lead to success. We focus on UK-listed small-cap stocks, seeking out those likely to benefit from structural growth and boasting high-quality earnings and cash generation. 

We aim to buy companies at a discount to their “real world” value to a private equity or corporate buyer and to invest for the long term. This framework has helped us cut through the constant barrage of news about Covid-19 to identify opportunities where we believe the market is missing the broader long-term picture (even if there is short-term disruption).

Clinigen will close the value gap

A classic example of a major gulf between a firm’s fundamentals and its share price is Clinigen Group (Aim: CLIN). Clinigen provides pharmaceutical products to healthcare providers in more than 120 countries. As most of these medicines are for critical and chronic conditions, there has been limited disruption to date. Still, the shares plunged from 900p to 360p as markets slumped, prompting us to top up our holding. 

Although the shares have since recovered somewhat, we believe the company is a unique asset that remains materially undervalued. Furthermore, recently acquired drug Proleukin is being used in numerous clinical trials alongside immunology cancer treatments. Its potential has yet to be factored in to both current forecasts and the share price.

Medica Group (LSE: MGP) has been affected by Covid-19, but is well positioned to emerge stronger on the other side. The company provides teleradiology services that enable medical images to be interpreted remotely by radiologists. A structural shortage of radiologists and increasing demand for imaging is driving strong growth: revenues increased by 19% last year. 

Although scan volumes are currently severely affected as the NHS focuses on Covid-19, the company has a variable cost base and a net cash position that should enable it to ride out a prolonged period of disruption. Medica is currently deepening its relationship with the NHS by providing the health service with its remote-working technology and this will stand it in good stead once normal activity resumes. Dr Stuart Quin, CEO since September, has an excellent record of delivering value for shareholders.

A resilient share registrar

The share registrar and financial services provider Equiniti Group (LSE: EQN) is a core holding, with a key attraction being the resilience of the underlying business model. Around 80% of sales stem from long-term recurring contracts. While discretionary revenue streams such as those relating to merger and acquisition activity have been affected by the crisis, more rights issues and share placings will offset some of this. 

We expect the business to remain profitable, cash generative and well capitalised this year. Longer term, there is opportunity in the US now that Equiniti’s strategic acquisition there has been fully integrated. The shares have fallen by around 25% since February to 150p –  an attractive entry point into a high-quality company.

Recommended

Share tips of the week
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: eight stocks that should deliver robust returns
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 of the week
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 of the week
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

The Bank of England should create a "Bitpound" digital currency and take the world by storm
Bitcoin

The Bank of England should create a "Bitpound" digital currency and take the world by storm

The Bank of England could win the race to create a respectable digital currency if it moves quickly, says Matthew Lynn.
18 Oct 2020
What would negative interest rates mean for your money?
UK Economy

What would negative interest rates mean for your money?

There has been much talk of the Bank of England introducing negative interest rates. John Stepek explains why they might do that, and what it would me…
15 Oct 2020
Negative interest rates and the end of free bank accounts
Bank accounts

Negative interest rates and the end of free bank accounts

Negative interest rates are likely to mean the introduction of fees for current accounts and other banking products. But that might make the UK bankin…
19 Oct 2020