Have you ever considered that past performance IS a guide to future performance? We’re regularly told this is not the case by financial regulators, asset managers and investment experts, yet banking group Mirabaud reckons can you learn a lot from history.

It believes that past performance can steer you towards future performance, at least when looking for certain types of growth stocks.

Mirabaud has been running an exercise for the past 17 years that tracks the performance of stocks that have beaten the FTSEurofirst 300 index over periods of at least a decade.

The banking group believes stocks which consistently outperform the market over a prolonged period have rare attributes. It suggests the superior performance reflects a stock’s inherent advantages, such as superior technology or barriers to entry, rather than simple luck.

SUBSTANTIAL RETURNS

Each year it runs a screen on the market to develop a portfolio which it calls ‘10-Year growth Oscars’. These portfolios have beaten the index more often (14 times) than they have lagged it (twice), plus only drawn once.

Its rolling annual portfolios have delivered 9.15% annualised returns since the exercise started in March 2001. The portfolios have risen by 342% in value over the 17 years, beating the index by 330%.

Some of the credible growth, multi-year winners in Mirabaud’s exercise include food supplier Cranswick (CWK), wealth manager St James’s Place (STJ) and fashion retailer Ted Baker (TED).

The highly-rated information is normally restricted to institutional investors. Fortunately, we’ve been given permission to open it up to Shares readers.

MECHANICAL SELECTION

It is important to stress that this is purely a quantitative exercise, mechanically selecting stocks because they meet specific criteria rather than uncovering them through qualitative research by an analyst or fund manager.

You must consider that some industries are experiencing structural change and so what worked in the past may not necessarily work in the future. Several of the stocks on the list have their fair share of critics as well as fans, such as safety group Halma (HLMA) and property portal Rightmove (RMV).

Even though Mirabaud’s performance statistics are very impressive, we’d advocate that you still thoroughly research any stock of interest on the list to understand both the risks and rewards before making an investment.

THE KEY CRITERIA

Although companies can get lucky and do well for an extended period of time, Mirabaud says the law of mean reversion appears very hard to ‘cheat’ over periods much in excess of five years.

By this it means most industries would see competition drive a ‘normal’ company’s returns down to the average over time, as reflected by a relatively small number of stocks qualifying for its 10-year growth Oscars portfolio each year.

However, its survey does indicate that exceptional businesses can consistently outperform the markets for upwards of 15 years.

To qualify for its portfolio, a stock must have various characteristics including:

– 10 years of price history.

– Outperformed the market by at least 50% over the same period.

– A relative price level within 30% of their 10-year high against the market – that helps to screen out stocks that may be going ex-growth.

– A 10-year relative price low no later than March 2013 – i.e. has to have happened in the first half of the 10-year period. Mirabaud assumes genuine growth stocks trend high over time. It says eights year of decline, for example, followed by two years of ‘scorching outperformance’ are characteristics of a mean-reverting recovery stock, not a growth stock.

– Better than median earnings revisions in the month when the annual portfolio is selected.

One reason why some stocks fit the bill is their ability to generate significant amounts of cash that can be reinvested into their business to help them stay competitive.

Capital-light business models certainly help, such as stocks that do a lot of their business online and can service additional customers at little or no extra cost.

There are also a few industrial companies on the list which you would expect to have large capital expenditure requirements such as new equipment. They make the grade thanks to having niche interests, so generic competition isn’t biting at their heels.

This year 252 names make the grade, of which 67 are listed on the London Stock Exchange. Mirabaud says the overall portfolio size is unusually large; for example, last year had 175 stocks overall.

THE GOOD AND THE BAD

Daniel White, head of strategy at Mirabaud, says most investors tend to underappreciate growth stocks. ‘People get cautious about these stocks continuing to do well,’ he adds.

Admittedly some good companies do go through bad spells and can experience share price weakness on the slightest bit of bad news.

For example, shares in retailer ASOS (ASC:AIM) have recently been weak because growth rates missed expectations. The business has also been juggling the day job with lots of development projects which has put pressure  on management.

It’s not the first time ASOS has been through a rocky patch on the stock market, but it’s important to note that it tends to bounce back.

Indeed, Mirabaud says the best gauge of the market’s belief in the durability of exceptional returns is not the length of a stock’s unbroken string of Oscars – referring to its 10-year growth portfolio – but ‘how quickly and how often it returns to the podium’ after periods in the doldrums. ASOS features in its current portfolio.

LOOKING FOR LEADING INDICATORS

The banking group pays close attention to earnings upgrade or downgrade trends. Many of the stocks in its Oscars portfolio show superior levels of earnings upgrades versus the broader market, as you may expect from a group of companies referred to as ‘exceptional’.

Not all stay this way. It looks for companies whose share price is continuing to outperform the market but where earnings revisions versus a specific universe of stocks are worse than average.

This is like the jaws of a shark – the gap between the top and bottom layers (the price and earnings trend) are getting wider and at some point, they have to close.

‘Where you have the earnings relative to market drifting down, but the price relative is going up, it could be a sign that there is trouble ahead,’ says White. ‘There are only two ways it is going to close: the earnings revisions start going up again or the price goes down.’

Examples of stocks in its current portfolio displaying this ‘jaws’ trend include animal genetics firm Genus (GNS) and building materials group Kingspan (KGP).

Some investors have been worried about Genus moving from market leader to joint number two in the dairy genetics industry, plus earnings are expected to be hit by unfavourable foreign exchange rates.

Investment bank UBS last week downgraded its rating on Kingspan to ‘sell’, saying the share price rally over the past year has gone too far and that the market was pricing in 13% EBITA (earnings before interest, tax and amortisation) margins into perpetuity whereas current margins are only circa 10%.

The average duration of a stock’s membership in Mirabaud’s list is three years, although there are plenty of examples of companies which have featured for longer periods. Construction equipment rental group Ashtead (AHT) is now in the portfolio for the ninth time, asset manager Schroders (SDR) is now in its sixth year (although not consecutive), so too fuel and healthcare products distributor DCC (DCC).

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THREE OF OUR FAVOURITE OSCAR WINNERS

The accompanying table shows some of the UK-listed names in the portfolio this year. Overseas-listed constituents include footwear group Adidas and Amplifon, the world’s leading hearing aid specialist.

We’ll now discuss three of the companies in more detail. We rate this trio as superb investments and stocks to buy for the long term.

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Halma (HLMA) £13.66

Halma is a global manufacturer and seller of a wide range of equipment largely demanded by health, safety and environmental rules. This includes hazard detectors, sensors and assorted environmental protection kits. The approach allows the FTSE 100 member to consistently perform almost regardless of the economic cycle.

Organic growth is supplemented by carefully selected bolt-on acquisitions. Halma is very careful in how it chooses its business areas, seeking resilient growth drivers based on advances in safety regulations, ageing and urbanising populations, and other demographic trends.

It also buys niche market businesses that generate strong returns and which it can help to develop – under a strategy called Halma 4.0.

‘Halma entered the FTSE 100 last year, reflecting the group’s 30-year track record of 11% compound revenue growth,’ says Shore Capital analyst Ben McSkelly.

‘While past performance cannot always be extrapolated, we believe the consistent delivery on the set business model can continue, with opportunities for further M&A bolstering the group.

‘The Halma 4.0 initiative should protect the company as its markets adapt to technological opportunities, but the group does not intend to massively pivot its operating model in order to become a service or software led offering.’

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Ricardo (RCDO) 964p

The engineer is best known for its expertise in the automotive industry, helping vehicle manufacturers to measure emissions and increase performance efficiency.

It also has expertise with environmental issues such as water resource management and environmental impact assessment.

Furthermore, it has a growing rail business where it helps clients to navigate the industry’s operational, commercial and regulatory issues.

Much of the market’s focus over the past few years has been on Ricardo’s exposure to the combustion engine and what may happen to its earnings if the world shifts to electric- powered vehicles.

Ricardo has long stated that its business would adapt and the message now seems to be getting through. It has a growing presence in the electric vehicle industry and also has a strong balance sheet which could help it fund bolt-on acquisitions.

The automotive industry itself is going through significant change and it will need experts like Ricardo to help navigate this journey.

Alongside these activities are other interests in the defence sector and the assembly of high performance engines for McLaren, plus designing and producing an advance hypercar transmission for Aston Martin.

The rail business continues to go from strength to strength and is well positioned to take advantage of positive trends in the global rail market, such as high levels of new-build activity. Relationships with major international rolling stock manufacturers Hitachi Rail and CRRC has led to helping them introduce their vehicles into the European, North American and Australasian markets.

Pre-tax profit for the year to 30 June 2018 is forecast to be £41m (2017: £38.3m), rising to £43m next year.

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Victrex (VCT) £29.80p

This is a specialty chemical company which supplies polyetheretherketone, also known as PEEK resin.

This super-strong, heat resistant and lightweight plastic is used as an alternative or replacement for metal in areas like transport, the industrial sector, electronics and medical devices.

The firm also has the capability of manufacturing finished and semi-finished products for its customers.

This added value allows it to charge a premium price, particularly given its materials and products often deliver higher performance and greater efficiency than the alternatives.

Internal estimates suggest if producers of materials running from medical implants to oil equipment substituted materials with PEEK in their supply chain its market would increase seven-fold.

The company has already invested heavily in extra production capacity and product innovation. It now faces an end-market environment that is near universally positive for volumes, said investment bank Berenberg last year.

A recent management shake-up doesn’t look like it will result in a radical change in strategy. Chief executive Jakob Sigurdsson is fairly new in the job, having only started last September. His career includes four years running global polymer manufacturer Promens before it was taken over by packaging group RPC (RPC). Finance director Richard Armitage started in April this year, joining from food manufacturer Samworth Brothers.

Liberum said last December that Sigurdsson seemed like he would accelerate and support PEEK business opportunities and not invest in new chemistries, make transformative acquisitions or change the manufacturing strategy.

That should reassure investors who enjoyed significant returns under the previous leadership of Dave Hummel who had overseen 10% organic compound annual growth in earnings per share and an eightfold increase in revenues since the company listed in 1995. Hummel had been CEO since 1993. (DC)

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