3 Small Stock Picks from a Bronze Rated Fund Manager

Small cap stocks have outperformed their larger counterparts for the last four years - and evidence suggests over the long term small and mid sized companies always deliver

Emma Wall 9 March, 2016 | 10:33AM
Facebook Twitter LinkedIn

 

Emma Wall: Hello and welcome to Morningstar. I'm Emma Wall and I'm joined today by Katen Patel, Manager of the JPMorgan Smaller Companies Trust (JMI).

Hi, Katen.

Katen Patel: Good afternoon.

Wall: So, you are going to give three stock picks for us today. What's the first stock?

Patel: The first stock I'd like to talk about is 4imprint (FOUR). They are a leading provider of promotional products to corporates in North America and the U.K. So, think along the lines of branded pens and umbrellas, but also more complex items such as embroidered apparel.

Now, they have been growing very rapidly over the last couple of years and that's been driven by a number of factors. Firstly, they have very innovative marketing techniques, their superior customer service, which has also led to some very high repeat business, but also the general strength of the corporates in the regions that they are operating in, so in North America and the U.K.

Additionally, they are very strong cash generators and they have made lots of acquisitions over the last couple of years. And as we currently stand, they actually have no debt on their balance sheet and a stockpile of cash with which to make further acquisitions. Just to give you an idea of the context of the market, they currently have a 2% market share and are already considered one of the leading players in the market, so clearly, huge scope for consolidation there.

Wall: You say it's a rapidly growing stock. I always think when I hear that, well, if it's done so well over the last three years why is it still a buy-in now?

Patel: I guess the key is having the scale to access the whole market and also increase your marketing spend, a lot of mom and pop outfits won't be able to keep up with the spend that they are doing in the market and also access different channels, so Google Trends, et cetera.

Spending money on various channels can be absolutely key in this market and just getting a name out there. So as they continue to grow, generate that scale and efficiencies from the marketing.

Wall: And what's the second stock today?

Patel: Second stock is Trinity Mirror (TNI), which is the U.K.'s largest newspaper publishing company. They've got a mix of regional and national titles such as The Daily Mirror but also a large portfolio of websites. They have gone through a very extensive restructuring program considerably cutting their costs, also reducing their debt and dealing with the provisions around hacking scandal. They are one of the cheapest stocks in the index on a P/E basis and again prolific cash generators and also had very strong results for the 2015 period with a positive outlook for 2016.

Wall: It's not been an easy ride for newspaper providers. I mean we've just heard last week that The Independent has folded and it's not the first paper or indeed I think the last over this sort of period that we'll see go, because fewer people are buying newspapers. I mean it's a one way trajectory. You say they have websites, but they do have enough of a balance to survive?

Patel: I guess the beauty is they are focused on cash generation and using that cash to invest in the digital side of the business. The key for us is looking at the expectations in the market versus what they'll actually deliver. So the market is already expecting a significant decline in print revenue and if they can perform better than this then clearly there is value there. So that's the key one when looking at these stocks.

Additionally, they are also continuing to consolidate the regional newspaper market. So they recently bought 80% of Local World that they didn't already own. And given their track record, we do expect them to cut considerable costs there and drive significant synergies.

Wall: What's the third and final stock?

Patel: Third and final stock is Staffline (STAF), which is a leading U.K. recruitment company and provider of employment skills. Their key focus is blue collar temp workers and also providing training programs for those who are unemployed. Now the market for U.K. temp workers has been growing over the last few years and that's been driven by trend by employers to hire more flexible workers, even employers such as Tesco.

They have also become a leading provider in the government's work program which provides training and support for individuals to get them off of benefits back into employment. Now, this is clearly a key area of focus for the government as they wish to reduce the cost of providing these benefits to the unemployed.

Wall: Katen, thank you very much.

Patel: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
JPMorgan UK Smaller Companies Ord353.76 GBX-0.07Rating
Reach PLC106.37 GBX0.53
Staffline Group PLC40.50 GBX5.06

About Author

Emma Wall  is former Senior International Editor for Morningstar

© Copyright 2024 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy        Modern Slavery Statement        Cookie Settings        Disclosures