Why cash is key for stock-pickers
The manager of SVM UK Growth says investors who want to gauge the true value of a company should follow the flow of money through it.
By Lora Coventry, Senior Reporter, FE Trustnet
Tuesday February 07, 2012
Looking at the cash on a company’s balance sheet is fundamental to the stock-picking process, according to SVM's Margaret Lawson
"We look for opportunities like price competition. What’s a company’s advantage? What are the barriers to entry? We try to capture that by looking at cash in the business," she explained.
"We want to be able to walk through the business, walk through the cash, because I feel that if we can understand where the cash goes in the business, whether it’s reinvested, whether it goes back to shareholders, or if it’s invested in mergers and acquisitions, then we have a better understanding of how that business runs. Cash flow is a metric that measures what’s left for shareholders."
Lawson, who manages the SVM UK Growth
fund, has been moving into secular growth stocks in a bid to play the current macro themes.
"We’re moving away from growth that was driven by household consumption and credit and towards growth driven by savings, manufacturing and exports. This is a long-term theme and our portfolio plays into that. We’re looking for secular growth stocks," she said.
The manager is optimistic on the outlook for the market for the next few months.
SVM UK Growth
is split into three: one is very low turnover and is invested in long-term growth stocks, one is more cyclical driven, while the third looks at managers who add real value to their business.
"We want them to improve earnings margins and cash flow. We’ve had businesses like Booker, a cash and carry business. [Manager] Charles Wilson came in and transformed it. He didn’t make acquisitions, but looked at his market place, moved away from tobacco and alcohol, which were low-margin, and started providing food services," Lawson said.
"His competition was in the hands of private equity, so he was able to take market share. He’s now moved into serving companies and cinema groups."
Performance of fund vs sector over 5-yrs
Source: FE Analytics
Our data shows SVM UK Growth has underperformed its peers in the past year, which Lawson says is down to the fund's cyclical silo. Over three- and five-year periods, however, it has trounced its IMA UK All Companies sector.