The UK mid-cap stocks that will perform whatever the weather
16 September 2013
With some experts warning that sentiment towards UK mid caps could change quickly if the recovery falters, Threadneedle’s Simon Haines reveals five stocks in this sector that should do well regardless of what the economy is doing.
Investing in UK mid caps has been a very profitable business of late, with the FTSE 250 beating both the FTSE 100 and the FTSE Small Cap so far this year.
Performance of indices year to date
Source: FE Analytics
Market commentators say that mid cap outperformance stems from the fact the index is littered with more economically sensitive companies that have benefited from improving domestic growth.
Some investors are worried that with valuations so elevated, any bad news could hit mid cap stocks very hard – particularly in top-performing domestic sectors such as housebuilders.
Nevertheless Haines, who manages the £137m Threadneedle UK Mid 250 fund, says he has found a number of good-value safer stocks that can perform well whether the economy continues to improve or begins to falter.
"The biggest theme, which is really the backbone of the portfolio at the moment, is 'self-help' type stocks," he said.
"These are some of the safest stocks in the index as they are for all seasons and should perform no matter what the market is doing. Obviously, economic growth would be good for these companies, but their earnings will remain if the environment is difficult."
"When people think of the FTSE 250, they tend to see it as a riskier part of the UK equity market and that it isn’t really appropriate for a more cautious style, but there are some lower-risk options," he added.
With that in mind, Haines highlights some of the stocks that make up the backbone of his portfolio.
SIG
"SIG is an insulation, roofing and specialist construction distributor," Haines explained.
"Ex-Sainsbury's chief executive, Stuart Mitchell, came in last year and has made a number of changes to the business model, such as increasing its fleet of lorries to supply all around Europe. This has helped earnings growth, which is something the market will pay up for," he added.
SIG is certainly a turnaround story.
According to FE Analytics, investors in the company’s shares would have lost money over five and 10 years. However, the stock has done well over three years and has returned 88.81 per cent over one year, against the FTSE 250’s 32.14 per cent.
Performance of stock vs sector over 1yr
Source: FE Analytics
Despite its recent performance, there is only one fund in the IMA universe that counts the £1bn company as a top-10 holding, namely Alastair Mundy’s Investec UK Special Situations fund. he holds 3.5 per cent of his portfolio in SIG.
At the time of writing, shares in SIG stand at £1.91.
Berendsen
Haines holds 5.6 per cent of his Threadneedle UK Mid 250 fund in Berendsen, the textile maintenance company, making it his largest individual holding.
"Three years ago, a new management team took over," Haines said.
"They are going on a journey of exiting faltering parts of the business and are redeploying that capital into faster-growing areas. For instance, they have been selling workware contracts across Europe."
"An example would be Berendsen washing German fire-fighters’ uniforms: these are long-term contracts, meaning they have reliable earnings. This doesn’t sound very exciting, but it is pragmatic and should be profitable," he added.
Our data shows that the FTSE 250 company has re-rated significantly recently, having returned more than 170 per cent over three years. The stock has also rewarded investors so far this year, having returned more than 60 per cent in 2013.
Haines is not alone in backing Berendsen in his fund.
Seven other funds in the IMA universe count the textile maintenance company as a top-10 holding. One of these is the five crown-ated Unicorn UK Income fund, which is headed up by FE Alpha Manager John McClure.
The stock yields around 2.9 per cent and the share price, at the time of writing, is £9.13.
Morgan Advanced Materials
Haines is also a fan of Morgan Advanced Materials as it is a turnaround, self-help story that should have steady earnings growth.
The FTSE 250 company had previously been known as Morgan Crucible, but the decision was made earlier this year to consolidate two arms of the business – Morgan Ceramics and Morgan Engineered Materials – to create Morgan Advanced Materials.
The company designs and manufactures materials engineered for specific components and custom parts for businesses in sectors such as energy, transport, healthcare and industrials.
Our data shows that investors in the stock have made money over most time frames, although its share price performance has by no means shot the lights out over recent years.
Nevertheless, Morgan Advanced Materials has performed well since its name-change, having returned close to 15 per cent over three months, slightly more than the returns of the wider FTSE 250 index over that time.
Performance of stock vs index over 3 months
Source: FE Analytics
The company is not widely held in the IMA universe, with only two funds counting it as a top-10 holding. The stock has a dividend yield of 3.29 per cent and is well-covered. Shares in Morgan Advanced Materials are currently worth £3.11.
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