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Six special sits to back as markets swing between optimism and despair

Six special sits to back as markets swing between optimism and despair

Alex Breese, head of UK equities at Neptune Investment Management, says he has moved money away from quality growth stocks towards value, hunting in areas of the market that are out of favour.

The manager of the Neptune UK Special Situations fund said he is starting to feel ‘quite cautious’ on some quality growth stocks, citing Aggreko as an example.

Quality growth is broadly trading on more than 20 times earnings, prompting Breese to search elsewhere.

‘We’ve taken money out of these areas and moved it into more value areas of the market,’ Breese explained.

‘Over the next two to three years, we expect the UK market to oscillate between optimism and despair, but there will be opportunities to pick up good quality companies, with good dividend yields.’

The manager said Booker Group is an example of a turnaround story that he held in the fund within his top 10 positions but has recently sold it in the view it has been 'priced for perfection'.

‘We first bought it in 2008 – it’s under new management led by chief executive officer Charles Wilson,’ said Breese. ‘Market perception of companies can change. In 2008 it was seen as a low growth company on eight times earnings.

‘Today, Booker is a serial outperformer driven by a strong management team.’

The manager, who has outperformed his typical peer by delivering 26.4% over three years versus the average of 24.2%, added the firm also recently acquired Makro which has provided a boost to business and is looking to replicate its UK business in India.

Another stock Breese owns is Wolseley, to tap the UK and US housing recovery.

‘The US housing recovery is firmly underway; in 2007 housing starts were down to half a million,’ said Breese. ‘Now they’re at 870,000 so momentum is building. We’re playing this theme through Wolseley.’

He added: ‘The company was hammered in 2008 with the downturn, and management went on an acquisition trail. Now it has new management, it is highly cash generative and it is a successful business. It also announced a special dividend in the last results.’

Redrow is another example of a cyclical stock turnaround  story that has benefited from self-help. ‘This firm was caught up in the UK housing downturn and then Steve Morgan came in 2009 and raised money,’ said Breese. ‘He had 30% equity at the start of the year and now has 40% in the firm.'

‘I don’t see much downside,’ added Breese. ‘If anything went wrong, I would see Steve step in and try and take it private.’

Galliford Try is a niche house-builder with expanding margins, and is a stock that both Breese and Mark Martin, manager of the firm’s Neptune UK Mid Cap fund, hold.

‘We see expanding margins across the house-building sector,’ said Martin. ‘The CEO invested heavily in new land in 2009 and 2010 -so it’s seeing increasing margins while other parts of the market are experiencing decreasing margins. House building will drive the economic recovery.'

Martin added Greg Fitzgerald is a well-respected, opportunistic CEO with a significant personal shareholding.

Breese also highlighted Qinetiq as a contrarian stock that has experienced a cash flow turnaround. Breese said although there are defence budget cuts ahead, there is a trend for governments to do more for less, which will benefit the likes of Qinetiq.

‘It had a weak balance sheet at the top of the market,’ said Breese. ‘So what’s changed? Leo Quinn has come in. It now has around 80% of its revenue in defence and 20% in the civil market, where there is a lot of hidden growth.’

He added: ‘This company has outperformed for a year and a half now; it’s cheap. I expect to see a higher dividend.’

Breese has returned 26.4% over three years versus his typical rival, who has delivered 24.2%.

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