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Derek Stuart: my pick of battered stocks
The manager of Artemis UK Special Situations, a fund recommended by Citywire Selection, discusses the stocks on his radar.
Derek Stuart, manager of the Artemis UK Special Situations fund, which is in Citywire Selection, is eyeing opportunities in 'cyclical' companies (those whose fortunes are closely tied to the economic cycle) that have fallen hard in the current volatility.
Stuart, who runs the £970 million fund alongside Ruth Keattch, is one of five fund managers whose top 10 holdings we follow for Citywire Top Stocks. As a result several of the companies mentioned here are listed on Citywire Top Stocks too.
The manager has recently added to his stake in satellite firm Inmarsat (ISA.L) and started a new position in automation business Invensys (ISYS.L) after both saw sharp share price falls after profit warnings.
He is also considering adding oil and gas services firm Lamprell (LAM.L) and defence company Chemring (CHG.L) if there is further pronounced weakness after both suffered profit warnings in recent days. Fenner (FENR.L) is also being looked at after its shares fell 8% on muted recent results.
'Invensys had a big profit warning in the first quarter and its shares were hammered. It is fundamentally a strong business split between automation, rail and controls for domestic appliances and its relatively new management team are sorting through its legacy issues,' Stuart said.
Continuing M&A activity
Stewart also expects the renewed surge in mergers and acquisitions (M&A) to drive returns over the next year as many companies start spending their considerable levels of cash.
'M&A was at a low point going into 2012 but strong corporate cashflows are being put to work now, and we are seeing big premiums of between 40% and 70% on some of these deals, which just demonstrates the fundamental value in the market, which many are missing because they are bogged down in Europe,' he said.
'There is so much negative news around but the FTSE is still up for the year and it also has a yield of 4%.'
Reducing engineers in Q1
'We started buying Inmarsat about two months ago at £4 and it is now at £4.80. Its earnings growth kicks in around the end of 2013 and it has had downgrades on its maritime business as well as losing business from satellite phones in Aghanisastan and Iraq.'
The fund had a strong first quarter of the year, but a poor second quarter with the duo taking money out of engineers and recycling the proceeds into defence stock BAE Systems (BAES.L) and health care firm Smith & Nephew (SN.L). That move has not borne fruit yet, but Stewart felt such stocks were too cheap to ignore, while at the time engineers had enjoyed a strong run.
Just under 50% of the fund was in large firms in mid July, compared with a historic high of 60% in 2008, although Stuart insists that bottom-up stock fundamentals drive his decision making regardless of market size.
At the end of June, ITV (ITV.L) had been built up to be the fund's largest absolute position, representing 4% of the fund, and displaying many of Stuart's favoured 'self-help' traits.
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Look up the shares
- Inmarsat PLC (ISA.L)
- Invensys PLC (ISYS.L)
- Lamprell PLC (LAM.L)
- Chemring Group PLC (CHG.L)
- Fenner PLC (FENR.L)
- BAE Systems PLC (BAES.L)
- Smith & Nephew PLC (SN.L)
- ITV PLC (ITV.L)
- BT Group PLC (BT.L)
- Micro Focus International PLC (MCRO.L)
- Devro PLC (DVO.L)
- Reed Elsevier PLC (REL.L)
- CRH PLC (CRH.L)
Look up the fund managers
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