Stock picking has never been so important, says Cartesian Capital
Jeremy Hall, manager of the Ignis International Cartesian UK Enhanced Alpha fund, says that with market volatility remaining high, risk appetite falling and companies now being ‘appropriately’ punished for profit warnings, stock selection has rarely been so important.
Hall, who expects to witness a marked increase in the performance differential among stocks over the coming months, says that, with macro threats continuing to weigh heavily on markets, it is vital investors seek attractively valued, robustly financed and durable growth companies. “Investors are becoming more risk averse in response to ongoing macro concerns such as currency weakness, low growth and sovereign debt downgrades,” he says. “Stock picking high quality companies – those able to navigate through these tough economic times – has rarely been so important.”
Stocks favoured by Cartesian includes British Gas parent Centrica, a company Hall believes should profit from householders’ drive towards energy efficiency. “Against a long-term backdrop of rising energy prices, householders will be more incentivised, both by economic self-interest and government assistance, to make their homes more energy efficient,” he says. “Modern boilers and proper insulation will form a central part of this effort. Centrica has the infrastructure, expertise and customer relationships to become a dominant provider of these services.”
Pharmaceutical companies, Hall believes, will also offer genuine growth against an increasingly difficult economic backdrop. Stocks he currently favours include Shire, a FTSE 100-listed pharmaceutical company specialising in treatments for attention deficit disorder, gastrointestinal diseases and human genetic therapy. “The key to Shire’s attractiveness is the fact that its products are still at a relatively early stage in their profit lifecycle, with many years set to run until the expiration of their patents in most cases,” he says. “That makes it a possible target for a bid from one of its much larger competitors, which are struggling to add products to their pipelines.”
Another pharmaceutical company favoured by Cartesian is AstraZeneca, which Hall says offers a secure yield. “AstraZeneca was boosted by a court decision to uphold patent protection of its Crestor cholesterol drug, and has since received an earnings upgrade. It is an example of a company that will be fine in a low growth environment.”
Although Hall believes that current conditions present a worrying time for consumers, there are a select number of consumer companies that he feels will continue to grow. One is SuperGroup, owner of the Superdry clothing brand. “This is an interesting business,” he says. “The company is growing quickly and has just finalised a deal seeking finance to drive further growth. The Superdry brand has grown in popularity and is now benefitting from great rental deals as landlords across the country try to lure their stores into their shopping centres.” Hall does however recognise that the company does bring with it some brand and fashion risk. “Consumers can be fickle about fashion trends but we think their pricing is sensible – aiming at mid-market rather than a premium pricing structure – and we think this is a brand that could have some tailwind.”
Overall, Hall says Cartesian will continue to place confidence in the performance of individual companies rather than macro developments, a stance that would only alter if there was a “full-blown resurgence” in the recovery. “That is a scenario that seems to be something of an outlier in terms of probability, particularly given the Conservative party’s attitude to fiscal stimulus,” he argues. “We look for companies that can help themselves and have the strength in management and balance sheet to profit from a challenging situation.”
With public sector cuts also likely to result in large scale job losses, Hall points out that consumers’ economic decision making, particularly towards discretionary spend such as big-ticket items, is set to change significantly, benefitting companies able to offer their customers a strong value proposition.
“Halfords is one company that will stand to benefit from depressed consumer confidence as more people choose to refit or repair their cars rather than replace them,” he says. “Even after recent price rises the company remains attractively priced at around 11 times next year’s earnings. Maybe Halfords can no longer claim to be an unloved stock, but we believe the story, and the share price, has further to go.”