3 Attractive UK Mid-Cap Stocks

Mark Martin: Good morning, Emma.

Wall: So you have a thematic approach to investing, don't you, which covers sort of three silos. What's the first and perhaps if you can pick a stock from that and explain why?

Martin: Sure. Yes. So the first silo I invest in is economic recovery stocks, and a particular theme that we're keen on within that is the house-building sector. One particular company that's very interesting supplies the picks and shovels as it were into the house builders is a company called Marshalls (MSLH). It owns and operates various natural stone quarries around the U.K., and we're seeing right now a significant shortage of natural stone bricks and natural stone paving, and Marshalls is in a fantastic position to benefit from the fact that in the U.K. we desperately need to build more houses. So, Marshalls is a very interesting company in that respect.

Wall: I mean a lot of the house-builders themselves have already experienced significant rallies. How has Marshals fared and is that trajectory going to continue?

Martin: I think you're quite right to raise the issue of valuations on one of the pure house builders. The house builders are on a quite high multiple of a pretty high book value. So that makes me slightly cautious. Companies like Marshalls haven't seen quite the same publicity. I suspect you haven't heard quite as much as about Marshalls in recent months and years as you have about the house builders. And also as I say it's a picks and shovels type company, supplying goods into the house builders, which to our mind is actually a much more attractive way of paying the house building cycle.

Wall: And what's your second theme?

Martin: The second theme in the fund is structural growth and these kinds of companies tend to be slightly lower beta but provides kind of a less cyclical and a more stable earnings and profit growth for the fund. Very interesting companies, Consort Medical (CSRT), and what they do is basically to produce quite high-tech pumps that essentially deliver drugs into the lungs of people who suffer from emphysema and pollution-type diseases, pollution-related diseases. And what we're seeing in places like China, even places like London, is more and more pollution and more and more respiratory diseases.

So I can say with a quite high degree of confidence that a company like Consort Medical will have a significantly larger addressable market in China in 20 years' time than it does now.

So, Consort Medical has got some very attractive growth opportunities. It has also got interesting option value in a joint venture that has with British American Tobacco again providing a pump or a valve that delivers nicotine into patients' lungs into former smokers lungs' in the e-cigarette market. And again that's quite an exciting kind of option market for Consort Medical.

Wall: That diversified revenue stream is always a positive thing with a company, isn't it? To mention your first point about China and pollution; although it's still a way off sort of Western standards, they are having a big push politically to reduce carbon emissions, does that have a negative effect on the company?

Martin: Well, I think not really. I mean, long term, I think sadly the fact is there is a still a lot of pollution in China and there are a lot of people very sadly who will suffer from those pollution related diseases and it's not just pollution, it's smoking and we're saying more and more instance of smoking in emerging markets generally. It's also industrialization, urbanization, these are all long-term, very visible themes that mean that we're quite confident, that market is sadly going to – only going to increase.

Wall: And what's your third theme.

Martin: The third theme is corporate turnaround companies and these are companies that are maybe slightly less reliant on economic recovery because they've got various operational and financial levers they can pull to engender their own recovery. And a very interesting company is QinetiQ (QQ.), it's a defense company, and it's got a CEO who has been very active in terms of managing the balance sheet and bringing it from a heavily indebted position to actually now being in a net cash position. He has also recently sold off an underperforming U.S. division, which actually now makes what remains of the company a lot more attractive, higher margin and higher growth.

So, we expect that the market will rerate QinetiQ in coming quarters, and we're pretty excited about QinetiQ too.

Wall: A lot of defense companies go into Middle Eastern, post-war environments and sort of plug the gaps that perhaps the public sector can't. How affected by geopolitical risks is the company?

Martin: Well, potentially geopolitical risk could long-term be a positive. We are seeing in the Middle East in particular, defense budgets starting to rise. We're also seeing in the U.S. these signs that the defense budget might be starting to bottom.

So, I think, again from a macro perspective – and that's obviously something that we think is very important at Neptune is looking at sectors from a macro prospective – there are signs that maybe the defense industry is starting to bottom globally.

Wall: Mark, thank you very much.

Martin: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.