Britannia rules the markets

Taking a contrarian stance over the past two years and buying British has actually proved a good strategy for most of the period and not just the most recent six months. Indeed, backing the five top stocks (as measured by share price performance in the three months before the screen) we highlighted from our screen in both of the years we've run it would have produced a market-smashing total return of 70.1 per cent (not accounting for dealing costs) compared with 32.6 per cent from the FTSE 350 (see graph). And backing the entire Best of British portfolio would have produced a return of 57.4 per cent.

Source: Datastream

Part of the logic behind my original desire to put together a Best of British screen was that the dire warnings being spouted at the time by some politicians and sections of the media about the state of the UK economy seemed to almost wilfully ignore the country's economic virtues. But regardless of the clamour in some quarters to relegate the image of the UK to near-PIGS status, the market fortunately never seemed to see much merit in the arguments and my Best of British stocks have gone from strength to strength.

Source: Datastream

At its heart, the Best of British screen is a simplistic momentum screen for FTSE 350 stocks that make most of their sales (75 per cent plus) in the UK. As such, the virtues of "buying British" are really a key component to the screen's success. The full screening criteria also take account of some broad measures of quality, risk and balance sheet strength.

As with previous years, I've focused on the top five stocks selected from the screen based on share price strength over the past three months in the write-ups below. All stocks passing the screen are listed in the table below that.

THE BEST OF BRITISH

Sports Direct

The strong three-month performance of Sports Direct's (SPD) shares has been helped by its elevation into the FTSE 100, which increased tracker fund buying. But the recent enthusiasm for the company comes down to a lot more than just its recently acquired blue-chip status.

First-quarter results last month underline just how well the group is doing from a trading perspective. It reported an 18 per cent year-on-year rise in sales in the three months. Despite a broadly unchanged amount of shop floorspace, the sports retail division produced a 14.5 per cent sales increase, while stock management improvements made a strong contribution to the 170 basis point increase in group gross margins to 42.4 per cent. The company's premium lifestyle division also reported extremely strong growth, with sales increasing 98 per cent thanks largely to the inclusion of the Republic chain in the reported numbers. The company has also been pursuing growth with a push into Europe.

Despite the first quarter beating most broker expectations the company is sticking with its full-year cash profit target of £310m. This caution at such an early stage in the year is understandable, especially as the company will not benefit from the Olympic effect it enjoyed in 2012 or the collapse of a major rival, as happened with JJB last year. Still, there are good grounds to hope brokers will be upgrading numbers as the year progresses.

Source: S&P CapitalIQ

Last IC view: Hold, 635p, 18 Jul 2013

ITV

Programme maker and broadcaster ITV (ITV) has proved to be quite a turnaround story since its 17.5p share price nadir in March 2009. Indeed, the shares also featured in our most recent quarterly blue-chip momentum portfolio. The key to the City's recent enthusiasm for the shares has been the incredible success of the group's production business, ITV Studios.

Production is starting to internationalise ITV's revenues - the company now ranks among the top five independent production companies in the US and top three distributors in Europe. ITV Studios has been bolstered by a number of shrewd bolt-on acquisitions and reported cash profit growth of 26 per cent to £63m at the half-year stage, which accounted for 22 per cent of the group total.

One of the attractions of the growing production profits is that it reduces ITV's reliance on highly cyclical ad revenues. A lack of major sporting and national events this year will weigh on revenues, but recent signs that the economy may be coming back to life bode well. The broadcasting business is also benefiting from cost cutting and the group has been growing its higher-margin online sales.

Last IC view: Buy, 165p, 31 Jul 2013

Howden Joinery

Howden Joinery (HWDN) looks a likely beneficiary of the government's contentious Help to Buy scheme. The company makes and sells kitchens, and broker Numis reckons the market remains 20 per cent below its 2008 peak. That suggests some attractive cyclical upside as transaction levels pick up.

But Howden has not been waiting on an economic turnaround to power growth. Over recent years the company has invested heavily in increasing capacity at the same time as winning market share through its strategy of selling kitchens to small building firms. The group has ambitions to continue this expansion by increasing its national network of depots from 540 to about 700. According to Numis, the investments already made in expanding production capacity should be able to service an increase in outlets of this magnitude.

From the perspective of the bottom line, the beauty of Howden's role as both manufacturer and retailer is that sales growth has a disproportionately large impact on profit due to the largely fixed costs involved in its cabinet-making operation. Coupled with the cyclical upside potential, this looks a very attractive story.

Last IC view: Hold, 288p, 25 Jul 2013

Legal & General

As far as our screen is concerned life assurer Legal & General (LGEN) is a 'Best of British' stock, but management's ambitions are increasingly seen as lying beyond these shores. Indeed, the UK is a highly competitive market for life assurers and the company is keen to pursue overseas acquisition opportunities, especially in the US. International business is already making an impressive contribution to growth, with £7.5bn of the £8bn first-half net inflows into L&G's asset management business coming from overseas.

Investors have little to complain about in respect of the group's UK operations, though. The company's first-half results reported strength across the business. Annuities sales were particularly strong and strengthening into the second half. Meanwhile the general insurance business benefited from low levels of claims and the savings operation was buoyed by the acquisition of the Cofunds fund trading platform.

The company's cash generation has also been impressive recently and underpinned a better-than-expected 22 per cent increase in the interim dividend. That kind of growth is particularly welcome from what is the second highest yielding stock from our Best of British screen - the yield is only outdone by the 4.2 per cent from Sainsbury.

Last IC view: Hold, 202p, 6 Aug 2013

N Brown

N Brown's (BWNG) half-year results, which are due on 9 October, may be scoured by analysts with a bit more interest than usual this year. A new chief executive, Angela Spindler, recently took over at the catalogue retailer, which has its roots in selling clothes to larger and older people.

The broad strategic approach of the group looks unlikely to change given N Brown's success over recent years. The group is moving into new non-clothing product lines, and has been launching new titles to appeal to a broader range of consumers. It has also been increasing its geographic reach. Investments have also been made in customer recruitment and efficiency improvements are being pushed through.

Analysts are interested to see where Ms Spindler intends to push the group in terms of its international expansion and its rollout of concept stores. N Brown's tentative moves into these areas have produced encouraging results, but whether the company has the appetite to embrace the risks associated with more aggressive expansion is yet to be answered.

Last IC view: Hold, 445p, 24 Apr 2013

THE REST OF THE BEST

Source: S&P CapitalIQ