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Jeremy Lang: five 'misunderstood' stocks I'm backing

Ardevora's founder highlights a handful of stocks that he feels other investors don't quite get.

‘For the rest of 2015, choosing to not own certain stocks will be at least as important as the choice of what to own,’ warns Ardevora’s Jeremy Lang.

This discipline has encouraged the fund manager to make punchy top-down calls and avoid certain sectors completely.

He deems most energy and mining companies as ‘too risky’. ‘The management of these companies still look to be in denial, so for the investment horizon we operate on, these are best avoided. We feel the same way about UK supermarkets and most UK banks.’

He said focusing on risk first, regardless of other people’s views, has served Ardevora’s UK Equity Income fund well. Lang co-manages the fund with William Pattisson and has returned 79.9% compared to the peer group’s 55.1%.

Here, Lang names five stocks he is backing which other investors have ‘misunderstood’.

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‘For the rest of 2015, choosing to not own certain stocks will be at least as important as the choice of what to own,’ warns Ardevora’s Jeremy Lang.

This discipline has encouraged the fund manager to make punchy top-down calls and avoid certain sectors completely.

He deems most energy and mining companies as ‘too risky’. ‘The management of these companies still look to be in denial, so for the investment horizon we operate on, these are best avoided. We feel the same way about UK supermarkets and most UK banks.’

He said focusing on risk first, regardless of other people’s views, has served Ardevora’s UK Equity Income fund well. Lang co-manages the fund with William Pattisson and has returned 79.9% compared to the peer group’s 55.1%.

Here, Lang names five stocks he is backing which other investors have ‘misunderstood’.

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Next

Next has a long, consistent record of generating free cashflow while still driving above-average sales growth. This suggests management is careful and patient, investing to allow sustained growth without taking unnecessary risks.

‘In the last two years, the business has continued to deliver in a powerful way. Results have consistently beaten expectations. This performance has been underpinned by continued capital discipline: excess cash has been used for shares buybacks or special dividends.

‘Going forward, management is likely to continue to be pragmatic and cautious, despite the success of recent years. We expect analysts will continue to be caught out and investors well rewarded.’

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Inmarsat

‘Analysts struggle to write something useful about Inmarsat. First, there are no other companies like it in the UK, which means there is no peer group to anchor expectations around. Second, there are a small number of large moving parts in the business. Third is the exposure to US government defence spending – the US division has been under pressure for many years, causing analysts to be gloomy about the entire company’s prospects.

'The final problem is the capex cycle. While investment in the business is fairly predictable, the numbers are slightly scary (satellites are expensive).

‘The company invested record amounts in 2013, but it caused a lot of anxiety for analysts and investors: what if all that investment does not pay off? As the peak of investment spending has passed and management has provided reassurance that the problems in the US are not a black hole, investors have been able to again focus on the positive longer term prospects for the business.’

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Cable & Wireless Communications

‘Cable & Wireless Communications offers a broad range of services, including mobile, broadband and fixed line telephone services. It has been an easy company for analysts and investors to ignore: the business has, historically, been a mish-mash of disparate operations which management have been trying to rationalise.

‘Management have been working hard to simplify the business in order to focus on what they are good at, in areas where they have critical mass. At the end of last year, the company announced the acquisition of Columbus International, a large privately owned telecoms business operating in Central America. Management are now in a position to refinance the debt in the business, reducing costs.

‘These changes have catalysed a subtle, but significant, shift in analysts’ attitudes. Rather than looking backwards at all the corporate chaos that popped out of Cable & Wireless in 2010, analysts can now start to see a sensible business with interesting growth prospects.’

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Taylor Wimpey

‘We became interested in house builders after the trauma of 2008-11 appeared to fundamentally change the way these companies were run. ‘Previously they had chased growth at any cost. Following the credit crunch, management across the industry seemed much more interested in making profits, generating free cashflow and rewarding investors for their patience. This translated into a more controlled supply environment, which should lead to a prolonged recovery with gently rising prices.

‘In the last year, investors have been torn between the temptation to believe life is really getting better and continued anxiety that another housing “bust”, fuelled by higher interest rates, is around the corner.

‘This anxiety was somewhat justified by earlier government policies specifically designed to accelerate growth, but the various home loan incentives have disappeared and the arguments about affordability and availability have returned.

‘The current low ratings of housebuilders, Taylor Wimpey included, indicate significant investor scepticism. If we are right in our belief that management are behaving responsibly and prospects are still improving, then share prices could have a lot further to run.’

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Reckitt Benckiser

‘Multinational consumer goods company Reckitt Benckiser is a simple, predictable business. The story on Reckitt has until recently been dominated by the differing views on the future of Indivior, its pharmaceutical division. Some analysts have argued it is a dead duck, others a beauty.

‘From experience, businesses harbouring a quantitatively small source of high anxiety often get mispriced. The narrative creates disproportionate anxiety and distracts focus from what really matters. For Reckitt, the Indivior story has recently become entirely irrelevant after the business was finally spun out into a separate entity, leaving Reckitt unencumbered.

‘Since the spin-off, Reckitt has lost its anxiety anchor and its stock price has ascended fairly effortlessly. Now it can be viewed like any other good quality and resilient business that offers a little growth: boring. But boring is good.’

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