Opportunities appear as investors take fright

Far from signalling the death of growth, market moves make quality stocks more attractive than ever

• In times of elevated risk and uncertainty it is easy to focus on short-term macro and geopolitical issues and ignore long-term investment opportunities
• Companies with strong fundamentals and sensitivity to long-term secular trends continue to provide opportunities
• Our three sustainable growth themes – People, Planet and Progress – are helping us identify companies with potential for long-term sustainable returns

It has been torrid year for UK growth stocks. While equities have suffered across the board – with the FTSE All Share down 4.8% - the FTSE 250 (a proxy for faster growing companies) has fallen 19.4%, demonstrating investors’ sudden loss of faith. [31 December 2021 to 30 June 2022, sterling total return basis.]

Given this performance, you could be forgiven for thinking that growth companies have suffered a flood of profit downgrades, or that there has been a collective realisation that the much-vaunted drivers of long-term structural growth are more short term than previously assumed.  But this couldn’t be further from the truth!

It remains our view that identifying good quality businesses, that can reinvest and compound their returns over time, is key to generating superior long-term returns.

It is easy to focus on the macro and geopolitical news flow when risk and uncertainty are on the rise. But it is crucial to keep in mind that even during periods of market turmoil, the fundamentals of many businesses remain robust and long-term trends are very likely to continue. Doing so can help you see the opportunities presented by fragile market sentiment.

Our three sustainable investment themes – People, Planet and Progress –help us look past short term market conditions and identify companies with the potential to benefit from secular trends that we believe are embedded in the way the world is changing.

The three case studies below demonstrate how we use these themes to guide us to companies that have been unfairly sold off given their clear quality and long-term structural attributes.

People: Pets at Home

This is a great example of a company with a strong business model that has been swept up in the de-rating of UK growth stocks since the start of the year. While the share price has fallen by around 40% from its September 2021 highs, earnings have continued to beat expectations, leaving it on a 7% free-cash-flow yield.

Pet ownership has risen significantly over the last two years in response to Covid lockdowns and a desire for a better work/life balance, leading the market to branding the company a moment in time ‘Covid winner’. Indeed, Pets at Home added 1.1m new customers during this period. However, pet ownership is not a one off expense and with their retail stores and veterinary practices the company look well set to continue benefiting throughout the full animal ownership cycle.

Earnings should also prove relatively resilient as expenditure on pets is likely to suffer less during a cost-of-living squeeze than other discretionary spending. Trends such as premiumisation should also provide support as owners seek to take better care of their pets.

The company is also set to benefit from their subscription and digital investment. They have approximately 1.5m pet care plans which generate visible, repeatable customer revenue every year. Their accelerating digital leadership will also help them leverage their data insights and offer more personalised, targeted solutions, driving customer loyalty, retention and lifetime value.

Planet: Ceres

While down by about 65% from its September 2021 share price, we see Ceres playing an important role in the transition to clean energy. Their ground-breaking non-combustion power generation technology will benefit from rising demand for reliable low-carbon power as companies strive to meet emissions standards.

You would be mistaken if you took the huge share price fall as an indication that the company has failed to deliver on expectations. In fact, the company have proven their technology and in March they signed a three-way joint venture with Weichai and Bosch to commercially develop in the key growth market in China. More recently, they have signed a deal with Shell to help them decarbonise some of the hard to abate parts of the energy system - a significant endorsement of their hydrogen technology by a major blue-chip company.

Progress: GB Group

Another company that’s fallen around 65% from its September highs, GB Group specialises in providing ID and location verification and fraud protection services, helping businesses onboard and manage customers. In the longer-term, we see the company benefitting from the growth of digital interactions, increased regulatory scrutiny, the rise of fintech and the shift from physical to digital crime.

This is a business that manages expectations extremely well. It has a track record of beating and raising earnings estimates and it did not disappoint in this regard recently following a better-than-expected full year trading performance.

The acquisition of Acuant in November 2021 has made GB Group the largest dedicated provider of ID verification services in the US, enabling it to scale more quickly in other global markets. The fall in its share price means it is now trading at valuation levels not seen in many years, making this an excellent entry point for a global UK technology leader.

Note: Companies shown are for illustrative purposes only as of 30 June 2022 and may no longer be in the portfolio later. It does not constitute investment research or financial analysis relating to transactions in financial instruments, nor does it constitute an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.