The devaluation of sterling, the recovery of the oil price and the price increase of Chinese exports are putting increased inflationary pressure on the UK economy, according to Miton’s Gervais Williams (pictured). 
The manager, who runs several funds and trusts for Miton including the five crown-rated UK Multi Cap Income fund, believes we could be near the end of the bond proxy trade, which has seen many investors flock into dividend-paying ‘stalwart’ stocks in a bid for safety and income.
As such, he has increased his focus on recovery stocks and is doing so through consumer-facing companies and market leaders trading on depressed valuations relative to their history.
In the below article, the manager gives five examples of holdings he has either bought or increased his exposure to recently and explains why he deems them to be attractive purchases.
easyJet
Low-cost airline operator easyJet’s struggles have been well-documented over recent months, following the announcement that its earnings for 2016 fell for the first time since 2009 due to a combination of the plummeting sterling and a series of terror attacks committed across Europe.
Performance of stock vs index over 3yrs
Source: FE Analytics
However, Williams has recently bought back into the holding – having sold it once before – as he believes its fundamentals so far this year are stronger than many people have anticipated them to be.
“There was an assumption that, with the devaluation of sterling, the number of people travelling to Europe would be much less. But actually, that hasn’t proven to be the case,” he said. “If anything, recent data suggests that most people are still going to Europe for their holidays and ‘staycations’, while they’re a little more popular, aren’t much more popular.”
The manager says that forward bookings for easyJet are also better than the broader market seemed to anticipate. Despite this, its share price has struggled due to concerns of overcapacity in the market area and the announcement of its profit warning during October last year.
“Net-net-net it actually seeing quite good growth,” Williams said. “The share price is right on the floor, it has quite a lot of cash on its balance sheet – partly because people pre-pay for their flights – and it is well-positioned for recovery.”
FTSE 100 constituent easyJet, which has a market cap of £4.2bn according to Google Finance, is trading on a P/E ratio of 9.81x and has a dividend yield of 5.08 per cent.
ITV
ITV is typically seen as a play on the UK consumer, given its dependence on advertising for revenue. Due to widespread concerns that consumer spending power could weaken this year as wage growth stagnates and inflation rises, its share price has taken a hit over 12 months and the stock is down 2.14 per cent over the last 12 months, compared to its FTSE 100 index’s return of 10.13 per cent.
“ITV is quite dependent on consumer spending; consumer advertising is a big part of their revenue,” Williams said. “They do have some challenges this year because they don’t have the same sports as last year – it had the Rio Olympics in 2016, for instance, which it obviously doesn’t have this year.
“But, overall, we think it is still well-placed for a consumer recovery, if consumer advertising is more resilient than people think it will be.
“The share price has been a bit dull which is great for us, it has a good yield, it paid a special dividend recently. It’s a perfect stock for consumer recovery.”
ITV, which has a market cap of £8.7bn, is trading on a P/E ratio of 19.41x and yields 4.8 per cent.
Nanoco
Further down the cap spectrum, Williams says nanotechnology company Nanoco is deeply unloved by the broader market but offers attractive long-term opportunities.
Over three years, in fact, the FTSE Small Cap constituent has lost 66.92 per cent while its index is up 32.83 per cent.
Performance of stock vs index over 3yrs
Source: FE Analytics
Williams now believes the company, which creates quantum dots for screen displays, is particularly attractively-valued given its future scope for growth.
“Samsung has developed a number of televisions with quantum dots and they have manufactured their own volumes up until now. But they are now growing at such a fast pace and becoming so much more mainstream that they’re now looking for new supply,” he explained.
“Nanoco invented the technology a long time ago now and it’s now coming to market. Using its technology, it will receive licensing fees when it comes on stream and it will get some revenues from selling certain parts of the spectrum which they’re not manufacturing directly.
“The effect of that is you move from a company which has been costing shareholders money on a year-by-year basis, to a business which could turn a profit quite quickly and could turn out to be one of the world market leaders in quantum dots.
“I’m not sure its share price has ever been lower. It is right on the cusp of getting all these massive flows in, yet people are so bored of the story that they really won’t give it a chance.”
Nanoco is trading on a negative P/E ratio of 7.33x and has a market cap of £78.5m.
Coats Group
Coats Group is the world’s largest manufacturer of industrial thread which is used by clothing companies across the globe.
Williams deems the company, which has a market cap of £866.9m, to be an attractive value play. While it has returned a stellar 112.71 per cent over the last year compared to its FTSE 250 index’s return of 17.14 per cent, it struggled to keep pace up until October last year. While it has done extremely well since then, it has fallen marginally behind its index over the last three months with a return of 6.36 per cent.
“The reason behind the share price last year was its three pension schemes,” the manager explained. “They were mature pension schemes; it was looking to agree with the regulator on how it deals with the long-term funding of those pension schemes. It had cash on their balance sheet, but it wasn’t able to pay dividends so they agreed settlements with the regulators.
“That has been a slight argument, there have been different views. What has happened in the last couple of weeks is that two of those pension funds have agreed how much cash they need from the parent to be viable for the long term.
“The third is still going through a process. The effect of that is the share price which has been overlooked and ignored. But it is now starting to recover quite sharply.”
Coats Group is trading on a P/E ratio of 17.82x and yields 0.84 per cent.
Crossrider
Isle of Man-based firm Crossrider is a software publishers company that floated onto the AIM market in September 2014. Soon after its IPO, however, the stock began to struggle and, during September 2016, it traded at a price of 24p.
“It came to market and it raised a lot of money. But, in the end, it decided the acquisitions it was going to make were going through slightly difficult trading conditions and it decided not to make any acquisitions at all. So the core business came down a bit, but it is still profitable,” Williams said.
“The rest of the company, which has been in cash, it hasn’t done anything with. After a while, with the disappointment in terms of growth rate and lack of acquisitions, the share price just collapsed.
“You have a core business that was still making money and you would be buying it for less than the cash on its balance sheet, so we bought quite a lot of it.”
The manager says the appointment of new CEO Ido Erlichman last year has been a positive move for the company, which has since acquired Cyberghost in a bid to expand into the cybersecurity arena.
“The chief executive is extending the range of services supplied by the core business into a wider range of services. The acquisitions are very small but, because he has the distribution network, he can get very good cash paybacks, so the earnings on the core business are now rising,” Williams explained.
“He’s still not spending an awful lot of money, thereby most of the cash is still there and the share price has been surging. It is now one of the largest holdings in the Miton UK Smaller Companies fund.”
Over the last year, Crossrider has more than doubled the performance of the AIM All Share index with a return of 64.19 per cent. Following the news of last month’s acquisition, however, it is down 12.23 per cent over one month while the index is up 3.94 per cent.
Performance of stock vs index over 1yr
Source: FE Analytics
The stock is trading on a P/E ratio of 30.77x.