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.
