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Three GARP contenders

Analyst Robin Hardy hones in on three companies which topped our recent GARP screen to assess their credentials
Three GARP contenders

The world according to GARP

Not the 1982 Robin Williams film but  Growth at A Reasonable Price, the methodology devised by investment guru Jim Slater, has long been a reliable strategy for picking stocks that can outperform.  Our GARP screen has thrown up three very different stocks, each beating positive paths through their respective end markets. A reasonable price does not always mean a low PE or EV/Ebitda if the fundamentals are strong, re-orientation or reinvention can augment the market drivers, large distributions can be foreseen, risk is very well-contained or the ESG case is very positive. Our three picks all have a strong investment backstory, but strong recent share price rallies have consumed much of the near-term value or sought to overlook risk.  

Beating their own drums

  • Ferguson – the transition to a wholly North American business is almost complete with the only question now being will Ferguson delist from the UK? A business transformed from an aggressive acquirer and branch opener into a smart user of technology and logistics to grow. This liberates the high free cash flow to make high returns, albeit with a bias to buy-backs. After a long overdue re-rating, however, the shares are now likely to mark time.
  • Smart Metering Systems – green generation is just part of the story in the transformation of the UK’s electricity space. A clearer and more granular understanding of demand via smart metering plus localised distribution and storage from renewables spark revolutionary change. SMS is a key provider running term, indexed contracts with the largest players giving great visibility into long-term growth – a hefty 65x PE, but in context that is not demanding especially when stood against 2020’s collateralised sale at 16x passing revenue. 
  • Hikma  – an ageing and long living global population heightens the need for access to affordable complex medicines. Hikma is well positioned to ride the near double-digit expansion in the generic/off-patent pharmaceuticals market, with strong margin growth driven by the very profitable injectables segment. Hikma offers 12 per cent EPS CAGR, but a near 60 per cent rebound post-Covid slump leaves the year two PE at 16.5x and the shares would look better value closer to 2,300p, but there is still good long-term attraction here. 
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