Discount retailer B&M, online fashion label ASOS and takeaway specialist Just Eat are the three best growth stories in the UK, according to LGIM’s Gavin Launder.
The manager of the five FE Crown-rated L&G Growth Trust said he believes growth can continue to outperform as it has done for much of the last decade.
As the below chart shows, the MSCI United Kingdom Growth index has outperformed the MSCI United Kingdom Value index by 22 percentage points over the past decade.
Performance of indices over 10yrs
Source: FE Analytics
“I think growth can continue to outperform, with the caveat that I think it has to be quality growth. The sort of growth we are looking for are companies that can do so under their own steam,” he said.
“They are funding their own growth with their own cashflows and so on which by implication means they will likely have a good return on invested capital.
“Where it is a company with a dream and a vision but no earnings, they could well struggle because those multiples can look infinite and ridiculous.”
While the valuations of these companies can be extreme, he said compared with value stocks earnings multiples of the fast-growing, cashflow generative stocks are not as stretched as some may believe.
“At the value end of things there will be some great opportunities I’m sure – there always are – but the problem with value companies is they are struggling on their returns,” he said.
“They either have low returns or almost no returns, and therefore struggle to invest to grow the business and to a certain extent the valuation gap is justified.
“It doesn’t always worry me. Yes as a growth investor I do actually look at valuations but I am happier to accept higher valuations than some of my value colleagues would be.”
As such the fund manager said that there are a lot of growth opportunities in the UK for investors willing to pay higher multiples. Below FE Trustnet looks at Launder’s three favourite UK stock ideas.
B&M
In the retail space, Launder said he is avoiding high street stocks such as Next, which he described as “the best of a bad bunch” but believes there is value in other pockets of the sector.
The first is discount retailer B&M, which since launch in 2014 has risen by 54.7 per cent.
Performance of stock since launch
Source: FE Analytics
Launder said it is a stock with a very good busy model, extremely good management team and business growth that also happens to play into a theme of UK consumers trading down.
“The stigma of trading down is much less than it was I suspect and they have to thank Aldi and Lidl for that,” he explained.
“It is perfectly acceptable to shop in Aldi and Lidl and people even will now tell you they have because they have saved so much money and B&M is riding on that wave.”
As well as this, the stock is positioned to grow significantly in the coming years, with a plan to increase its number of stores from 250 to nearly 600 stores in the UK over the next five years.
“Each one of those stores pays back in eight months so it is a very positive cycle,” he noted.
The firm also recently announced the acquisition of Heron Foods, a high street convenience store that could rival the likes of Tesco Metro.
“They are using the B&M model of restricting the number of items you offer and getting much bigger discounts from the manufacturers on those and then passing a lot of that through,” he added.
“They are growing in Germany and they would love to grow in France so they can roll that model out but for the moment there is enough growth in just the UK that you don’t need to worry about the other bits.”
ASOS
Staying with the retail theme, another company poised to grow over the next few years is online fashion retailer ASOS.com.
“With this online retail the first question you have to ask is ‘can Amazon do it better than you can?’,” Launder said.
“In some businesses we have looked at it is not clear that Amazon can’t do it better than they can but I think in ASOS’s case it would be difficult.
“They are very niche – it is women’s fashion for 20-year-olds mainly and obviously that cohort is ageing slightly so they will have to adapt or add a brand name which they could easily do.”
However, what sets it apart is the fact that in the UK, roughly 40 per cent of what they sell is their own label, a figure that jumps to 70 per cent in the US.
“It seems the easiest way to differentiate yourself is to say to your reasonably loyal cohort of buyers that you won’t find this anywhere else,” the manager added.
“I imagine Amazon is very good in the clothing market for jeans, t shirts, trainers – the standard clothes you have bought before and know the size.
“Fast fashion where people buy a dress, use it a few times and buy a new one the following summer is cheap.”
The stock took off between 2011 and 2013 before slipping back in 2014 and has been on a steady growth trajectory since, rising 2018 per cent since its low point in October 2014.
Performance of stock over 5yrs
Source: FE Analytics
While it is trading at a high earnings multiple, it is growing at 30 per cent plus per annum – a figure Launder believes it can maintain for many years.
“I think to be very bearish on it you need to think that that starts tailing off quite quickly after only two years or so and they have consistently surprised people for years now,” he said.
“It is not obvious that that is going to tail off any time soon and in fact we had a pickup in sales again recently.”
Just Eat
The final stock is the online takeaway specialist Just Eat, which Launder said plays into a technology theme that is sorely lacking in the market.
“Within tech, with ARM gone – that was a big holding which is a shame – and WorldPay as good as gone, there isn’t much choice of pure tech in the £2bn-and-upward end of the market and what there is I wouldn’t say was cutting edge must have like ARM was,” he said, citing examples of payroll specialist Sage Group.
As such, he is focusing on the stocks that are using technology to disrupt other businesses within their business model: something he believes Just Eat is doing.
“They are using technology as an advantage. Whether that is a consumer stock or a tech stock I don’t really care to be honest but it goes into a bucket somewhere,” he said.
He compared the stock to European rival Delivery Hero which he holds in his L&G European Trust noting that they are very similar stories.
Indeed, earlier this year Delivery Hero agreed to sell its UK business Hungry House to Just Eat – a move made necessary to become the leading player in the market.
“What they worked out some time ago is that you need to be a clear number one in each market,” he said. “Once you are number one the marketing spend starts to fall down, your pricing obviously gets better and margins go from a generally healthy mid-teens to 70 and 80 per cent.”
“So Just Eat is in 12 or 14 markets and it is pretty much number one in all of those now, whether it goes into other markets or not. It probably doesn’t need to at the moment – there is so much they can do where they are.”