Markets are unusually turbulent at the moment, with Trumponomics putting investors in a headspin and geopolitical instability increasingly dragging on confidence. This has disrupted several industry norms and many strong businesses that have previously enjoyed higher, solid valuations have been dented.
However, growth businesses with well-executed strategies will continue to outperform and that’s what growth investors’ objective should be: relative outperformance. It is something of a pipe dream to think a positive rate of climb can be achieved indefinitely, regardless of the macro climate. Let’s look at some growth drivers and stocks that appear to fit the bill.
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Risk
The adage: high risk, high return remains true. One of the very best long-term performers in the UK, investment trust 3i (III), exemplifies this notion. As a private equity fund, 3i is a higher-risk business – its investments’ trading performance are less visible and are not subject to the same degree of external valuation as listed companies. In addition to that, 3i is heavily skewed to a single investment: European non-food retailer Action However, Action is a steeply growing business that is highly cash generative and appears able to grow overall net asset value (NAV), the key share price driver. 3i’s NAV is forecast to grow at 18 per cent compound in the next couple of years.
The shares have stepped back a little in the past few weeks but after rising at breakneck speed (by more than 175 per cent) in the past two years, a 10 per cent decline in unsettled markets should not really cause any sleepless nights. The shares have exhibited about as close to unending upwards performance in the past five and 10 years as one might ever hope to see, and with NAV still looking strong there is a robust expectation that the share price can continue to track its upwards trajectory.
Steady expansion
Other businesses grow through well-executed acquisitions, giving a two-pronged growth profile: organic growth within older additions, and a steady flow of new earnings streams funded out of strong underlying free cash flow. This is known as a ‘buy and build’ strategy.
Two great examples here are industrials business Halma (HLMA) and Aim-traded Judges Scientific (JDG). Making a handful of acquisitions each year, these businesses focus on acquiring best-in-class, small businesses in niche but long-term growth fields such as safety, health, measurement, compliance and environmental technology, ideally still run by their founders. New additions tend to thrive with the availability of fresh capital, technology transfer from other group businesses, and exposure to an enlarged field of potential customers.
Judges hit some bumps in the road in 2024 (primarily slower order intake from China) and, while forecasts have been lowered, the long-term growth trajectory still looks strong. Halma has been a steadier ship, but has also seen a material de-rating in recent weeks and months. Both stocks have long commanded a higher valuation – year two price/earnings (PE) ratios in the high 20s – but have de-rated recently, with Judges today standing at close to a five-year PE low.
Social need
Businesses that track structural societal trends often make strong long-term investments. Pharmaceutical stocks are driven by the global trend of rising populations of older people and the use of technology to conquer diseases such as cancer. Well-run pharma businesses can become almost self-sustaining growth engines, with free cash flow from successful ‘blockbuster’ drugs enabling stronger R&D and acquisitions of quality, late-stage drugs and/or their creators.
AstraZeneca (AZN) has risen consistently over he past decade using the inherently defensive nature of drug development and medical treatments and this ability to sustain its growth drivers. The board’s decision many years ago to focus on oncology and rare diseases/’orphan’ drugs has been the power behind the earnings and share price performance, and should remain so. Naturally, drug development is risky and new drug failures or late-showing complications can occur, but a strong new drug pipeline and diverse in-use portfolio such as we see at AZN will tend to relegate such occurrences to just minor hiccups.
Less powerful than health treatments but still addressing core social needs are businesses that manufacture food and other vital household products. A core player here is branded goods company Unilever (ULVR); a solid long-term business, although it suffered a little when consumer spending pressures were at their most acute and big name items were more often swapped out for own-label. As spending patterns begin to normalise, it has returned to a position where it can optimise its well-balanced portfolio in terms of product split and geography.
There’s a strong growth story too at Premier Foods (PFD). While having a narrower portfolio than ULVR, it owns big brands such as Mr Kipling, Angel Delight, Homepride, Oxo, Bisto, Batchelors and Sharwoods’. Shaking off a raft of financial items dating back five to 10 years, the finances here have been righted and pension issues resolved, which allows for a strong, positive change in capital allocation.
Cranswick (CWK), which has evolved from a basic sourcing and supply chain pork business into a sustainability-led operation, is becoming more diverse via ranges of finished foods, downstream/value-added pork products and pet foods. Pork remains the world’s most consumed meat (36 per cent share) and global consumption is expected to continue growing.
Geopolitics
For some investors, defence stocks have held something of a pariah status. The war in Ukraine, compounded by the political shifts in the US, have thrust non-US defence stocks into the limelight and attitudes have been put through enforced change. Reluctantly or otherwise, defence stocks have become something more akin to a staple industry.
Nato is potentially unravelling, and with an inevitably smaller slice of the immense US defence machine being allocated to Europe, even the 2 per cent of GDP Nato members pledge to spend on defence looks inadequate. Spending is not, however, likely to be restricted to European or Nato members. The first and third-largest overseas US deployments are to Japan and South Korea and reductions here would also likely be felt in Australasia and elsewhere in south-east Asia. These nations are likely to up their spending.
This creates a strong climate for the few remaining UK-listed defence players and makes them longer-term growth stocks. Although strong growth is already forecast for the likes of BAE (BA.), estimates are likely to prove light in practice and rise more rapidly than analysts allow for. So if conscience allows, this stock, or perhaps the more ‘passive’ end of military spending businesses such as Cohort (CHRT) or Chemring (CHG) – if hard military is still unpalatable – can be viewed as a growth stock on a 10-year view.
Structural change
In the name of business efficiency, ever more businesses are refining their operations so as to do only what they know best, and leaving their more peripheral work to others – they outsource their non-core activities. In this space, one name has a powerful presence: led primarily by food service but expanding into an ever wider range of activities, this is caterer Compass Group (CPG). Strong industry trends are augmented by strong free cash flow and a capital allocation skewed to growth investment, which means CPG is another stock that has posted almost unbroken, straight-line share price performance. Double-digit EPS growth has become the norm here and looks set to continue to the end of this decade.
While Covid-19 clearly dented this business, that crisis actually accelerated the growth of outsourcing. The very healthy performance during the 2008 financial crisis is also a useful pointer to the robust nature of this business.
Smart strategy
While high-street retail is struggling, Next (NXT) is thriving. While it offers staple rather than fleeting fashion options, it has also been busy buying up failed high-presence brands (Cath Kidston, Joules, Reiss, FatFace), closing their high-street spaces and allocating floorspace in its larger out-of-town stores. Next has also revitalised these brands online and has opened its internet platform to a growing array of third-party big brands not sold in-store. Then there is ‘total platform’, which allows myriad small retailers to, for a revenue share, warehouse, promote, sell, finance and deliver those third parties’ products through the group’s already expensed networks.
This is a rare example of how a well-managed business with a smart operating strategy can make progress against a negative market undertow.
Well-run business models
Our final two choices are stocks that have performed well over the long term but have recently run into softer ground: telecoms billing (and much, much more) platform Cerillion (CER) and high-street fast-food chain Greggs (GRG).
Cerillion had, arguably, had the best UK stock market performance of the past 10 years – see our previous write-up (‘London’s best small-cap tech stocks’, 17 December 2024). However, despite still showing the promise of double-digit growth and strong market dynamics, the shares are almost a quarter lower than last summer’s all-time high. There have been no slips or cracks, so this looks like a simple case of “can’t keep rising forever”, not altogether surprising after a 10-fold rise in five years. While the price has slipped back, it only rewound as far as its April 2024 level and may have already started its climb back, potentially in the nearish term surpassing last summer’s high.
Greggs is a powerhouse business pushing hard on new high-street openings, extending its opening hours (mainly evening), expanding franchising and creating more off-high-street locations (petrol forecourts, retail parks, supermarkets, universities and hospitals). However, a growth warning recently (not the same as a profit warning as these relate to current trading on the nearest year’s forecasts only) has driven analysts to lower estimates by around 22 per cent, but the shares have dropped by double this amount. This has left the stock down on a PE rating not seen for around 12 years. The shares experienced what chartists call a ‘lead cross’ (where the 50-day moving average and 200-day moving average cross while both moving down) and the price collapsed five weeks later. Given the still big and ambitious strategy, along with the disconnect between the trading outlook and severity of the de-rating, this could prove to be an opportunity to acquire a growth stock with a value stock rating.
