It’s no secret that the FTSE 100 index has outperformed year-to-date after the post-referendum slump in sterling and increased geopolitical uncertainty pushed investors into more internationally-focused, large cap stocks.
Over longer-term time horizons, however, companies further down the market cap spectrum have historically outperformed thanks to proportionately higher growth prospects when compared to their larger peers.
Performance of indices over 10yrs
Source: FE Analytics
Dan Harlow, who manages the four crown-rated AXA Framlington UK Smaller Companies fund, talks FE Trustnet through a handful of UK stocks in his portfolio that himself and his team believe could offer investors exciting opportunities over the long term.
Gear4Music
Gear4Music is a Yorkshire-based firm that sells music equipment and instruments online. It is a fairly recent addition to the market, having floated on the FTSE Alternative Investment Market (AIM) index in June 2015 with a £25m valuation.
Since its IPO, the stock has returned 202.45 per cent compared to the FTSE AIM All-Share index’s return of 6.9 per cent.
Performance of stock vs index since IPO
Source: FE Analytics
Harlow, who invested in the company less than three months ago, said: “I watched this company for a little while – when it came to the stock market about 18 months ago there was a quite a high private equity and management ownership of the stock.
“Really it’s part of the evolution of a young company; it proved out some of its ability to execute, which is a big tick for us. As part of that, was a liquidity exercise which gave us the opportunity to take some shares at £3.”
He explains that the company has increased the number of items it has for sale on its website by more than 25 per cent over the last 15 months. Additionally, its forecast sales growth for this year is 60 per cent.
The manager says chief executive Andrew Wass is also looking to expand the business across Europe and there are plans to open distribution centres in Germany and Sweden.
“One word people probably shout is Amazon and Amazon is obviously a fantastic company, but there are the real specialist areas where they’re probably never likely to be king,” Harlow continued.
“If you’re really into your music and you want choice, this is where you have to go.”
The £88.59m company doesn’t currently have dividend or P/E data available given how recently it floated.
Augean
Another young company the manager likes is Augean, which offers specialist services in hazardous waste management.
The firm, which is headquartered in Walton, floated onto the AIM market back in 2004 and is now £62.72m in size.
It has comfortably outperformed the FTSE AIM All Share index over one, three, five and 10 years. It has significantly underperformed over the past decade, however, having lost 58.39 per cent compared to the index’s loss of 11.22 per cent.
“Pricing potential at a specialised dump for hazardous waste is greater than at other waste disposal units, as you’re unlikely to find many more of these being approved or certified so there’s a nice demand and supply dynamic there,” Harlow said.
“This is a slightly different company, its execution has been a little bit challenged over the last year or two and as a result, the stock fell to a single digit price-earnings ratio. We really didn’t think that reflected the strategic value of the asset, they’d just made their first acquisition, we’re very impressed with the management team.
“I think some of the challenges they’ve had aren’t of their own making and sentiment on the stock and the name will improve.”
Augean has a P/E ratio of 13.23 per cent and yields 1.06 per cent.
Proactis
Proactis is a £74m company, headquartered in Wetherby, offering e-procurement solutions to other organisations to control their expenditure on goods and services efficiently.
“If you’re a county council, you have suppliers – of whom there will be many, whether they’re renovating people’s homes or collecting bins or fixing lights. It’s been hugely bureaucratic in the past, all paper-driven, there has been risk of fraud and the risk of mistakes has been incredibly high,” Harlow explained.
“They are trialling their system through Flintshire County Council which is currently their only relationship in the public sector space. They’re also working with ScrewFix and Carnival Cruises on a similar basis, they’re looking to move their systems electronically.”
“Ultimately it’s a lot cleaner, a lot more efficient. The risk of fraud is reduced and, over time, you can take the cost out as you need fewer people to be handling invoices and such.”
“On lots of levels, it’s quite a compelling proposition. It’s not yet the mainstay of the business, but we’re quite excited about the next level of growth for the company.”
The firm completed its acquisition of Intesource – which also offers e-sourcing solutions – in 2014. Harlow says the business will be able to grow organically through the strength of its product as well as through carefully selected acquisition.
Since its IPO in June 2016, it has outperformed its FTSE AIM All-Share index by 275.88 percentage points with a total return of 257.08 per cent. A majority of this growth has happened over the past five years, having returned 661.98 per cent over this time frame.
Performance of stock vs index since IPO
Source: FE Analytics
Proactis has a P/E ratio of 25.32 per cent and yields 0.87 per cent.
Avon Rubber
Avon Rubber is one of the top 20 holdings in AXA Framlington UK Smaller Companies’ portfolio and is higher up the cap spectrum than the previously mentioned stocks; it has a £324m valuation and is a constituent of the FTSE Small Cap index.
“The firm creates both dairy products and breathing apparatus. It works in the defence markets with quite innovative solutions for breathing masks that can manage chemical as well as smoke threats. Then on the other side it basically creates dairy farmer filters for milking and it’s the market leader there,” Harlow explained.
“It operates in two distinct divisions but it’s quite niche, which we like.”
The stock designs, manufactures and tests its products on sites across the US and Europe and sells products on a global basis.
Over the past decade, Avon Rubber has outperformed its FTSE Small Cap index by more than eight times with a total return of 624.89 per cent. It has struggled over the past year, however, having lost 1.34 per cent while the index is up 9.77 per cent.
The stock has a P/E ratio of 13.61 per cent and yields 0.79 per cent.
Victoria Carpets
The final stock on the list is Victoria Carpets, which has a market cap of £272m and is based in Kidderminster.
The manufacturing and design firm floated onto the AIM market further back than our data stretches. Over the past decade, it has returned a whopping 5,739.61 per cent compared to an index loss of 11.22 per cent.
Performance of stock vs index over 10yrs
Source: FE Analytics
While its growth has been more muted over the past year as well as the last one, three and six month periods, it has still comfortably beaten its index over these time frames.
Harlow bases his stock selection on bottom-up fundamentals and will hold stocks for between three and five years, but he says recent currency movements could be set to benefit this holding over the medium term.
“A lot of flooring and carpets comes from the Benelux region and there seems to be anecdotal evidence that those companies are already increasing their prices by 10 to 15 per cent given currency movements,” he explained.
“If you’re a domestic producer, that helps you form a competitive solution. That’s not to say Victoria Carpets don’t have some cost pressure as well because they’re importing some of their components and raw materials and feeling some pressure there, but it won’t be to that extent.
“There are two-way advantages there in terms of really supporting a competitive position domestically and also for certain exporters, there is that extra driver.”
Victoria Carpets has a P/E ratio of 12.87 per cent.