Smaller companies have defied market logic over the past five years. Despite the UK being in recession - considered an unsupportive economic environment for small caps - the asset class has thrived.
Here, Gervais Williams of Miton explains why the best is yet to come, and which three stocks you should be backing now for future returns.
Emma Wall: Hello and welcome to Morningstar TV. I’m Emma Wall and here with me today is Gervais Williams of Miton to give me his three stock picks.
Hello, Gervais.
Gervais Williams: Hello there.
Wall: So what’s your first one?
Williams: Well, what I’m interested in is companies which are enjoying a period of growth irrespective of the economy at large. And some of the companies which haven’t done well during the credit boom are starting to see renewed opportunities. A good example of that might be Greencore. Greencore is a food manufacturing business. It supplies to all major supermarkets just in U.K. and U.S. And in particular, it’s enjoyed a period where it’s been getting increasing pricing power.
So, you've seen margins being improved. We're seeing in particularly turnover growth. Turnover growth has grown about 68% between 2010 and projected to 2015. Lots of top-line growth. A company, which is generating lots of cash, it was on a 9% yield, has gone up three times to a 3% yield, but still on a 10.8 P/E till September. I mean, it’s just incredible, still plenty of opportunity, a lovely stock, a company which has already performed well. It’s a mid-cap stock now, but there are other companies coming through.
So, perhaps another example of that, particularly, if you get around £100million or just below that in market cap term, so an example of that might be Randall & Quilter Investment Holdings. This is an insurance company, involved in insurance services. It’s again enjoying a period of growth. It’s probably growing at a 15% compound on a top line. It’s not far off net asset value, so very good tangible assets in the balance sheet. A decent yield looking at over a 7% yield; just a lovely business growing really well, completely wrong price in my view, again, great holding for us.
And then as you get a bit smaller, again, you get into companies something like Fairpoint. And the reason why I like a company like this, which is involved in debt management solutions for individuals, is unusually it does better when the economy gets worse.
So if we do find that the economy has a good run, but then peters out, then it’s nice to have stocks in your portfolio which are likely to do better. So this is a company, which is still doing pretty well. It’s on an 8.5 P/E. It’s fairly cheap. It’s got cash in the balance sheet. It’s got a yield of over 5%, 5.5% to 6%, which has grown 40% in the last three years, just a lovely investment. So, there is plenty around for those looking for good and quality investments.
Wall: Thank you very much, Gervais. This is Emma Wall from Morningstar TV. Thank you for watching.
