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AAA-rated Henry Dixon: three massively undervalued stocks

by Robert St George on Dec 04, 2013 at 11:48

AAA-rated Henry Dixon: three massively undervalued stocks

Henry Dixon, the Citywire AAA-rated manager of the Undervalued Assets fund who Wealth Manager revealed recently moved from Matterley to GLG, has shared three companies he believes will drive his performance in the months and years ahead.

At Matterley, the house he co-founded in 2008 before selling it to Charles Stanley in 2009, Dixon’s Undervalued Assets fund has returned 166% over the past five years compared with 97% from the FTSE All Share – a top-decile record in its giant UK Equities category.

Despite the market’s surge over the past year, Dixon (pictured) maintained that 55% of its constituents were still undervalued. He supposed that the FTSE 100 would only hit dangerous territory around the 7,400 mark, more than 10% higher than today’s level.

As an example of an undervalued larger company at the moment, Dixon suggested Direct Line. The insurer trades on a multiple of 10 times its earnings, with a price-to-revenue ratio of less than one.

Dixon attributed this to ‘sector malaise’ among insurers, epitomised by esure after its ‘poorly communicated’ floatation and the subsequent disappointment of its maiden dividend.

However, Dixon commended Direct Line’s management as ‘very much more disciplined’ as they were ‘not afraid to retreat from the market’ when conditions were unfavourable. ‘There is no point grabbing low-margin business,’ he said.

This had left Direct Line very well capitalised, noted Dixon. ‘That paves the way for attractive returns to shareholders in the form of dividends,’ he remarked. Its forecast dividend yield is around 6%.

Furthermore, Dixon contended that the money Direct Line pours into gilts and other bonds could prove more profitable as quantitative easing unwinds and interest rates rise. ‘That investment return could pick up markedly,’ he argued.

A mid-cap highlighted by Dixon is QinetiQ, the defence group that has been weighed down by concerns about lower military spending. ‘We do not like to buy things that are in favour,’ stated Dixon.

For Dixon it is also a self-help story as it has rationalised its portfolio, making it more attractive on a valuation basis even though its share price has almost doubled since its 2010 trough. ‘The debt has fallen so it is cheaper now,’ Dixon observed. ‘That is a very rare characteristic, I can assure you.’

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