Fund manager view: Five stocks poised to thrive through Brexit volatility
Jeremy Lang, manager of the Ardevora UK Income fund: “Multinational consumer goods company Reckitt Benckiser is a simple, predictable business. The story on Reckitt has until recently been dominated by the differing views on the future of Indivior – the pharmaceutical part of the business. Some analysts have argued it is a dead duck, others, a beauty.
“From experience, businesses harbouring a quantitatively small source of high anxiety often get mispriced. The narrative creates disproportionate anxiety and distracts focus from what really matters. For Reckitt, the Indivior story has recently become entirely irrelevant. After years of procrastination, the business was finally spun out into a separate entity, leaving Reckitt unencumbered. Since the spin-off, Reckitt has lost its anxiety anchor and its stock price has ascended fairly effortlessly. Now it can be viewed like any other good-quality and resilient business that offers a little growth: boring. But boring is good.
“The new Reckitt will continue to be rewarding, because analysts and investors will underappreciate the rarity of such businesses. However, at least investors will not have to put up with the prior stock price wobbles associated with anxiety over patent issues inside Indivior.”
Ketan Patel, portfolio manager at EdenTree Investment Management: “We believe the long-term outlook of Mears will be relatively unaffected by the referendum result. The market-leading provider of social housing services in the UK has built up a strong forward order book, growing margins and a track record of delivering long-term returns to shareholders.
“Management has tackled the issue of wage inflation – the living wage, by engaging with clients at an early stage and only taking on profitable business. This augurs well for the business, given the significant long-term business opportunity that an aging population brings. The company’s excellent earnings visibility – all UK – is supported by a robust balance sheet.”
Hugh Yarrow, manager of the Evenlode Income fund: “Diageo is a global leading alcoholic drinks business with a portfolio of very strong brands such as Johnnie Walker, Tanqueray, Guinness and Baileys, and a well balanced portfolio between developed and emerging markets. The last few years have been tough in terms of operational performance as emerging market growth has slowed. This sales slowdown has also been exacerbated by a much-needed adjustment in supply chain inventory.
“However, we think the long-term investment case remains compelling. Diageo currently provides a dividend yield of 3%, well supported by free cash flow, and the long-term potential for dividend growth is very good. The most recent dividend increase was 5%.
“In the near-term there are also some positive dynamics at play. Diageo’s US sales performance is improving and the recent fall in sterling will provide a tailwind for cash flow and dividends given the company’s global footprint. The US is Diageo’s most important market and represents about one third of sales and more than 40% of profit.”
Martin Todd, co-portfolio manager of the Hermes Sourcecap European Alpha fund: “Over the long-term, Auto Trader will not be overly impacted by the prevailing macroeconomic uncertainty that lies ahead. Auto Trader’s business model remains relatively unaffected by the rise and fall of used car prices – advertisement listing prices do not change relative to the expense of the vehicle. Auto Trader also generates further revenue from selling information on transactions to dealers and through premium listing advertisements.
“Auto Trader has fundamentally improved the economics of the used car market, for both buyers and sellers. It is a high-margin, asset-light business with a singular focus on the UK. Its online business model is not labour intensive, and capex requirements remain low. Its unwavering focus on improving marketplace efficiencies and lean business model makes it a very compelling investment case. We believe the fall in the shares post Brexit creates an attractive opportunity despite economic concerns.”
Brian Cullen, manager of the SWMC UK fund: “Dairy Crest has undergone a transformation as the sale of its milk business has unleashed a branded consumer products business, with a strong track record. In addition, this company also now has a nascent but compelling growth opportunity in the markets for demineralised whey protein and galacto-oligosaccharide. These additional markets have the potential to transform the profitability of the company in the coming years. These opportunities are emerging just at a time that weak milk prices have made pricing within the cheese division more challenging, and the company’s share price has performed poorly this year as a result.
“However, there are signs that milk prices might be turning – though this possible inflection may have been missed given the chaos surrounding Brexit. More specifically regarding the referendum, Dairy Crest should be a net beneficiary, at least from a currency perspective. Weaker sterling both increases the value of Dairy Crest’s exports of whey and GOS, as well as diminishing the attractiveness of imported cheddar competing with Cathedral City.
“In addition, we feel Dairy Crest’s specialist high-margin business could well prove attractive to a potential acquirer. If such an acquirer operates in a currency other than sterling, then Dairy Crest now looks a considerably more attractively priced asset than it has in recent months. The combination of these factors means that Dairy Crest appears very well positioned even in the uncertain post-Brexit world.”