There are good growth prospects to be made from the UK stock market, irrespective of how low interes...
There are good growth prospects to be made from the UK stock market, irrespective of how low interest rates fall or the economic outlook.
But high returns will be very stock specific and confined mostly to those companies that are engaging in self help programs and transforming themselves, says Trevor Green, UK Growth fund manager at Credit Suisse Asset Management.
A successful transformation story involves Amey, which was a traditional construction company back in 1996, delivering cyclical earnings and being very much geared to the UK economy. In 1996 Amey was trading on a Price Earnings Ratio of about 6-7 times, which was similar to the sector and therefore at a significant discount to the rest of the market.
Green says: "Now the company has moved forward and is a very much more of an exciting play. It is involved in public contracts and environment issues, carrying out work for Railtrack and the road companies. The important thing here is that it has a lot of recurring revenues. From a fund management point of view is a sign of quality." According to Green, the management of this company was highly aware that it was in a very cyclical industry and knew it had to move into something more stable to achieve consistent growing earnings.
"It was on a multiple of 6-7 times, and the market has now given it a rating of 30x. I've since taken profits on these stocks," he says.
Another example is the company John Menzies, headquartered in Edinburgh. This company was a retailer with a traditional wholesale business.
Green says John Menzies is no longer a retailer, but in fact is very much a wholesaler, and in addition has moved into aviation services.
The company is still on an attractive rating and Green expects that there is plenty of potential for an upside.
"The logistics part of the business currently still only accounts for about 10% of the earnings, but management are talking about doing further deals. There is something happening and there's the opportunity to get into this company early as itís still on a PER rating of 10 times, in line with the distribution sector. If this company is going to transform itself, you could see the rating of this company move forward," says Green.
"The past success story of Amey and the likely forward success of John Menzies has nothing to do with what's going on in the UK economy, or interest rates. It is about the company doing something about their businesses. Green said Credit Suisse is therefore looking for management with vision, who look at what they have got, look at what they want and take the business forward. Many companies will attempt to transform themselves, but will be unsuccessful, which is why it is important to sort the wheat from the chaff.
"Of course they do not all work, which is why we do the analysis. We are looking for effective transformations and therefore get down to the nitty gritty when we meet the management of companies."
He says that just because a company is stable and has a positive future, it does not mean it is necessarily the best opportunity around.
"Arm and Autonomy, for example, are two of the largest hardware and software stocks in the UK market. Both have extremely exciting outlooks, but their market capitalisations are at £5.4bn for Arm and £2.7bn for Autonomy," he says.
"These are large companies. If you are going to invest in these, you are not the first to find them. The key going forwards is not looking at Arm and Autonomy and deciding whether they are cheap or expensive, it is about the future and looking for the next companies."
One example, according to Green, is Motion Media, which has developed the software for video phones.
Video phones are a very early concept and there is a lot of cynicism about whether they are going to work, their future and the fact they are still very expensive. Currently, Orange is trying to pilot them.
"The market cap of Motion Media is £170m," says Green. "If you buy now and if this concept works, you have gotten in very early to this company. I would rather take the risk of buying this company with this sort of market cap than the Arm's and Autonomy's of today."
Meanwhile, Green says it is arguable whether Vodafone can still be classified as the largest growth stock in the UK market.
"The great story from late 1997 to the end of 1999 was mobile penetration. Vodafone and the rest of the operators kept exceeding expectations. The key to whether that level of strong performance will happen again depends on what happens now. We have heard about the disappointments of WAP phones, and we know that third generation mobile telephony keeps getting post phoned," he says. Therefore, the key to Vodafone's success, going forward, is whether it can actually transform itself. Rather than relying on earnings through selling mobile phones, Vodafone needs to increase the income it earns per subscriber.
Green says: "Take, for example, my journey home on a train from Waterloo. Everyone around me is on the phone ringing their respective half to say they are running 10 minutes late, or five minutes early. You will know Vodafone is back on track when the people on the train are not ringing home, but booking their next holiday or sending flowers to their other half, through the internet on the mobile phone, rather than just phoning their partner.
"When that comes through, then there will be a great opportunity to get into Vodafone once again. We have already seen three years of growth. It is now a case of looking at Vodafone and deciding what it is going to do over the next week or next month. There will be clear indications down the road as to whether this is back on track and there will be an opportunity to get back into this company."
Jenne Mannion is a journalist on Investor's Week
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