There are plenty of investment opportunities as a long/short UK equity manager in today’s market environment, according to Smith & Williamson’s Mark Swain (pictured), whose four FE Crown-rated fund is fully invested. 
Swain, who has co-managed the Smith & Williamson Enterprise fund since its launch in 2006, said a combination of stretched valuations and Brexit-related uncertainty means there are many attractive short positions available to invest in.
This is perhaps unsurprising, given increasingly bearish views from several investment professionals regarding UK stocks.
However, Swain – who is a bottom-up stockpicker – said there are also opportunities to add to long positions at the moment, with many investors selling out of sectors in their entirety as a knee-jerk reaction to political instability.
“The great thing about running long/shorts is that you don’t need to make a call on the market,” the manager explained. “All of this uncertainty has actually provided a really rich opportunity because dispersion has increased.
“You have more idiosyncratic stock risk, which is much better than a QE, macro-driven environment where all buckets move in the same way.”
Because the combination of Brexit negotiations, the election of US president Donald Trump and the fading of quantitative easing (QE) has increased stock dispersion, he said there are a greater number of micro-drivers for investors to benefit from.
One such driver, according to Swain, is the squeeze on the UK consumer as wage growth has failed to keep pace with inflation, which has led to a wide disparity between the performance of consumer-facing stocks.
Performance of indices in 2017
Source: FE Analytics
“Rewind the clock back two years ago, and we were very positive on the consumer,” the manager said. “Real incomes were increasing and the consumer was in a pretty good place. Going into Brexit we reduced that position then after the vote we completely flattened it because the world had changed.
“What I would say is that we are long some of the retail roll-out stories which are always the best retail stories, then we’re short the bigger-ticket items that require greater household spending.”
While some investors – such as Rathbones’ David Coombs – are concerned about the exponential rise of Amazon and its impact on consumer stocks, Swain said it is a case of being selective.
“Amazon is a huge concern, absolutely. That is why the high street is a very difficult place to invest in at the moment and the mid-market is really struggling because they don’t have the pricing power. The legacy operators don’t have the e-commerce platforms to really compete,” he explained.
“However, there is a position on the high street for these sorts of businesses and, if you have a differentiated brand or product that people like to see in person, feel, or try on and they have a decent online platform, there are exciting stocks out there.”
Below, Swain discusses three long positions he holds in UK consumers which have been sold indiscriminately by investors, but which he believes will do well over the medium-to-long term.
SuperGroup
First up is FTSE 250 constituent SuperGroup, a men’s clothing company which owns the brand Superdry.
Swain said: “SuperGroup has not been without its problems in the past, namely when they first branched out into the US and they entered a very poor licencing deal which didn’t work out.
“But that’s all changed now and they’ve sorted out their US deal. They no longer just sell brightly-coloured T-shirts like they did three or four years ago. They now have a woman’s range which is doing very well.
“It comes back to this roll-out story. If you’re increasing your volumes, you can get much better terms and conditions with your suppliers because the big worry for retailers is the rising input costs with weak sterling.”
Over five years, SuperGroup has returned 178.2 per cent compared to the index’s return of 91.46 per cent.
Performance of stock vs index over 5yrs
Source: FE Analytics
According to Google Finance, it is trading on a P/E [price/earnings] ratio of 21.55x and has an EPS [earnings per share] of 81p.
B&M European Value Retail SA
Next up is Blackpool-based B&M, which is one of the UK’s leading variety retailers and is a constituent of the FTSE 250 index.
“B&M is another company which, again, is doing a lot of interesting deals – rolling out new products – and everyone’s very worried about the input costs there,” Swain said. “They’re growing their EPS at more than 20 per cent and its rating is in the high teens. That to me is a growth profile versus valuation that is very attractive.”
Since the stock floated in June 2014, it has returned 47.81 per cent compared to the FTSE 250’s gains of 35.86 per cent.
It has endured a turbulent time over the years, however, and has a maximum drawdown of 31.27 per cent over this time frame.
B&M has a P/E ratio of 27.59x and yields 3.9 per cent.
JD Sports
Swain’s third and final pick is JD Sports, which is also a constituent of the FTSE 250 index and sells sports fashion clothing.
While it has outperformed its index by more than 10 times over the last five years with a stellar 1,039.97 per cent return, it has lagged over the past six months having lost 2.92 per cent.
Performance of stock vs index over 6months
Source: FE Analytics
Swain said: “JD Sports has benefitted from the fallout of Sport Direct to a certain extent. The Sport Direct ‘pile it high, sell it cheap’ approach is not what Nike and Adidas want when displaying their latest products.
“Generally speaking, everyone is trading in baskets and, since Brexit, everybody has wanted to short the UK consumer. The retail basket would have included, for example, Next and JD Sports.
“However, at Christmas JD Sports achieved like-for-like [sales] in excess of 15 per cent and Next had like-for-likes of minus two. So, yes, they’re both retail stocks but they’re performing very differently and operating very differently.”
He added: “You can pick winners and losers, and the fact that everybody is very bearish on the UK consumer provides opportunities where some of these valuations get oversold.”
JD Sports is trading on a P/E ratio of 18.34x and has an EPS of 21p.