Fund Managers' Favourites: 3 Solid Growth Stocks

Funds and Securities Mentioned in this Video:
MFM Slater Growth Fund

Hutchison China MediTech (HCM)
AstraZeneca (AZN)
NCC Group (NCC)
Oxford Instruments (OXIG) 

Previous videos from the “Fund Managers’ Favourites” series:
- Fund Managers’ Favourites: Small-Cap Picks
- Fund Managers’ Favourites: More Small-Cap Picks
- Fund Managers’ Favourites: 3 Extra Small-Cap Picks
- Fund Managers’ Favourites: 3 Technology Picks

Video Transcript:

Alanna Petroff: In a world where we are experiencing very slow economic growth or sometimes economic contraction, it's hard to find companies that are doing very well. But that's Mark Slater's job. He's from Slater Investments and he runs the MFM Slater Growth Fund, where he's looking particularly for companies that are growing, and growing quickly.

So, we are going to talk about some of his favorite investments today. Mark, thanks for coming in.

Mark Slater: Thank you.

Petroff: So, let's quickly talk about what your fund does? What are you looking for?

Slater: We are looking for companies which are growing reliably and sustainably at double-digit rates, ideally somewhere between 10% and 20% per annum, with strong cash flows that we can buy relatively cheaply in relation to their growth rates.

Petroff: Okay. And now, let's go through your top three picks. So, we'll start with Hutchison China. Tell me little bit about that.

Slater: Hutchison is in the healthcare space primarily, and what we like about that company is it's got an identifiable tailwind in the – the Chinese Government is spending a lot of money trying to improve the healthcare of urban workers. Their healthcare business is benefitting from that, and it's growing earnings at about 15% to 20% per annum. We think that part of the business justifies the entire market capitalization.

In addition to that you have in that business an R&D operation as well, which is separate, which has recently received a very attractive licensing payment from Astra Zeneca for one of their pre-clinical drugs, which validates the value of the rest of that part of the business, which we think will start to be understood better by investors. So, you've got the earnings driver on the one side and this very IP rich R&D business on the other, which we think – and both of those will drive the valuation forward.

Petroff: Now NCC Group is your second choice. Tell me a little bit about that.

Slater: NCC has two divisions. The sexy part of the business with the tailwind, if you like, is in the ethical hacking space. So, good-guy hackers stress testing people's Internet security. That's a very fast growing part of the business, they are the market leader in the UK and Europe.

They also have in the other part of the business, this is a business called software escrow, which is pretty well a monopoly business in the UK, it's not quite, but it's a very dominant player. This is where big corporates will pay small amounts of money to ensure that they've got access to source code from their software providers. It's quite a complicated area, but that's a very cash generative, almost annuity-style income business. Very reliable, growing more steadily, growing less excitingly, but nonetheless, it's a good part of the business.

Petroff: So a solid part of the business on the escrow side and then the ethical hackers is growing very well?

Slater: Exactly.

Petroff: Okay.

Slater: The combination is a 15% to 20% growth rate for the business.

Petroff: Not bad.

Slater: Yes.

Petroff: And Oxford Instruments is your other top pick and it's also the top holding in your Growth Fund right now. So, tell me about that.

Slater: Oxford, we are very keen on. I think it's had a good run, but it's still a very attractive long-term proposition. The company is a market leader in nanotechnology instruments, which it sells into the R&D space and into industry. Again, there is an identifiable driver, a tailwind if you like: Nanotechnology spending is being prioritized all over the world and Oxford is very well placed to capitalize on that.

The business – we see the growth coming from the top line revenue, going along nicely as it is at the moment, plus the scope for margin improvement. They are also very good at making bolt-on acquisitions, which are earnings accretive as well. So, it's nice growth. We see again sort of 20% type growth over the next few years, with a P/E of about 17, so not expensive for that kind of growth.

Petroff: So, you think that now might be a good entry point? It's up roughly 300% over the last five years...

Slater: It's not as good as it was, but I think it's a very high quality business, it's very well positioned. So, with great businesses, you never get – the right thing is only to pay a fair price for a good business, a really great business. It's a fair price.

Petroff: Let's go over the key risks for each of these companies as well, because they are not without their risks.

Slater: Sure. I think with Hutchison the key risk is the price of the herbs, which are the core ingredients for their healthcare operations. Those herb prices fluctuate a lot. I think that problem was mainly in the past, but nonetheless, it's a risk potentially.

I think for NCC the main risk is with the retention of key staff on the hacking side, but they are very good at doing it, they are very good at keeping people interested, but that is the risk potentially.

I think with Oxford the main risk is a more general sort of macro risk, the risk of a big slowdown. I think that would affect some of their industrial customers. Now, they were pretty resilient in the last slowdown, and they are selling things people really need, but nonetheless, I think there is some risk on the macro side.

Petroff: Okay. Thank you very much for joining me.

Slater: My pleasure.

Petroff: That was Mark Slater from Slater Investments. And for more information about the companies we discussed you can look at the links below this video. You can also see more "Funds Manager Favorites" videos below here. Thank you.