Five reasons to be cheerful by Derek Stuart - UK Special Situations Fund

What I would invest in now

Remember the “irrational exuberance” of the US Federal Reserve’s Alan Greenspan, in 1996? Well now, in my much humbler view, irrational pessimism is blighting stockmarkets worldwide. It reminds me of Jim Slater in November 1974. Asked for his investment tips for 1975, he replied: “An ample supply of tins of baked beans, a bicycle, krugerrands and a shot-gun.” And yet, almost 35 years later, we’re all still here – somehow.

I don’t know – no-one does – if we’re at or near the bottom, either in terms of economies or stockmarkets. Forecasting macro-matters is a fickle and foolish business, wrong much more often than it’s right. What I do know is that I can now buy – and am buying – good companies at prices I’ve never seen before (after 18 years in this industry) and do not expect to see again.

Take, for example, consumer goods firm Unilever as a core holding. Almost half of its business is in emerging markets, which are always as quick to recover as they are fast to fall. It’s seen as a staid old lady (with no disrespect to ladies, staid, old or otherwise) and the market dislikes it. Yet under new senior management, the firm is reinvigorating itself. You might think the world is coming to an end. But we don’t. If we’re right, Unilever will do well.

The oil services company Wood Group is another stock which has been out of favour – despite its excellent record of success in a brutally competitive sector. Its shares have fallen along with the oil price since last summer, and now trade on a lowly price/earnings multiple of 6.5 times – against the market’s 9 times. While spending by its customers will slow, no doubt, this is now fully reflected in the share price, a fact not missed by the management team who have recently invested heavily in the shares.

Perception and reality, I find, can be as distant in stockmarkets as they are in real life. The industrial group Delta is seen as half-asleep. Yet it has changed radically, shedding unwanted assets to leave a defensive core which manufactures steel products (fencing, poles etc) for sale into public sector-funded infrastructure in Australia. Substantial cash on the balance sheet has been part-deployed to contain what was once a crippling pension fund. Full resolution of this issue should eventually allow a re-rating of the shares - and meanwhile the dividend provides an attractive 7% yield.

At the less well-known end of things, we like Lloyds’ insurer Omega Insurance.

Significant hurricane activity last year and the disruption caused by the failure of AIG have resulted in a much improved rating environment for the insurance sector. Omega has an outstanding, long-term record and is in the process of raising fresh capital to take advantage of this better outlook.

And banks or financial services? No way, most people say. But look at Close Brothers, another company with great promise – in my view. Bid approaches in late 2007 and early 2008 prompted a re-think for the group. Close has been quietly refocusing under strengthened management, de-emphasising volatile transaction-related activities in favour of more stable lending and wealth management. The business is strongly capitalised with a healthy deposit base and a risk-averse approach to lending. It should do well as the mainstream banks struggle to return to business as usual. And in the meantime, it’s paying investors a handsome 7% yield.  

These are just five of many companies whose share prices may be down, but whose businesses are far from out. In these testing times of corporate Darwinism, some companies will not only survive – but thrive. 

Source: Internal as at 16 January 2009.

 

Any research or analysis contained in this document has been procured by Artemis for its own use and may be acted on in that connection. The contents of the document are based on sources of information believed to be reliable; however, save to the extent required by applicable law or regulations, no guarantee, warranty or representation is given as to its accuracy or completeness. The document may include forward-looking statements which are based on Artemis's current opinions, expectations and projections. It is provided to you only incidentally, and any opinions expressed are subject to change without notice.

FOR PROFESSIONAL ADVISERS ONLY. Issued by Artemis Fund Managers Limited which is authorised and regulated by the Financial Services Authority (www.fsa.gov.uk), 25 The North Colonnade, Canary Wharf, London E14 5HS and is a member of the IMA. Artemis Fund Managers Limited is a member of the Artemis Marketing Group. We only market our own unit trusts.