Plenty of opportunities despite markets rallying

We talk to a smaller company fund manager about spotting investment ideas in the current environment
Thursday 11 Jan 2018 Author: Daniel Coatsworth

The markets have started the New Year in a bullish manner with a repeat of the same trend seen in 2017: mid and small caps are outperforming larger companies.

Many of you may assume high market levels make it harder to find decent investment ideas. In reality we’re still finding plenty of stocks well worth buying at current levels.

The key is taking a long term view of a company and looking at its prospects versus rivals and broader markets. This approach resonates with how FP Octopus UK Micro Cap Growth Fund (GB00BYQ7HN43) manager Richard Power picks stocks for his portfolio.

He says there are still ‘pockets of the market’ that present exciting opportunities for investors. Indeed, eight new names were added to his portfolio in December 2017, which he says is unusual as it is higher than normal for the fund.

MARKETS REMAIN ATTRACTIVE

You may consider the large number of additions by Octopus to be a surprise given the widespread chatter that markets are overdue a correction. However, it illustrates how market experts are still finding opportunities.

Recent additions to the Octopus portfolio include gaming sector service provider Sumo (SUMO:AIM). Power also picked up a stake in Best of the Best (BOTB:AIM) whose share price took a hit in December after the gambling company said it would have to pay higher taxes.

Some of the stocks in Power’s portfolio have already seen significant gains since investment, yet he still sees potential for even more value appreciation in many cases.

For example, he reckons patent translation group RWS (RWS:AIM) and pharmaceutical provider/services firm Clinigen (CLIN:AIM) could double in size again over the next two to three years.

IMPORTANCE OF DELIVERING ON A PROMISE

The key to successful small cap investing is to back companies who deliver on their stated intentions. That might be making acquisitions which always add value; or being able to hit or exceed earnings guidance on a regular basis.

Power says management strength is one of the most important factors behind his investment decision making. He likes managers with a clear vision and who are able to deliver.

Big success stories for the Octopus fund no longer in the portfolio include Fevertree Drinks (FEVR:AIM) and construction group Breedon (BREE:AIM). ‘Unlike some micro-cap funds, we don’t sell a stock when it is no longer a smaller company. We like to maximise the potential of a business.

‘We sold Fevertree when it was worth £2.6bn due in part to Schweppes’ comeback. We sold Breedon when it was worth £1.3bn as it had by then already seen earnings upgrades and made a large acquisition.’

As for future potential portfolio stars, Powers says Angling Direct (ANG:AIM) could be ‘the next Gear4Music’ referring to the musical instruments retailer which has increased more than five-fold in value since summer 2016.

He also favours media group Future (FUTR) which is also one of Shares’ top stocks for 2018.

On that note, I’d like to wish everyone the best of luck with their investing this year and hope you continue to find Shares a valuable source of news and opinion to support your investment journey. (DC)

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The Shares team
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