New Year Naps - Top Stocks for 2024 and a few random samples

It’s been a topsy turvy year in the UK stock markets. A bull trap rally into February heralded a slow grind down towards new lows in late October. It seemed like yet another year of declining UK stock markets was on the cards, but Santa’s Rally brought some cheer with a rapid recovery from the lows. Most UK indices posted gains for the year: FTSE All Share +3.8%, FTSE 100 +3.8%, FTSE 250 +4.4% (as of 28th December). It’s been more of a struggle in the FTSE AIM All Share , which was down 8.2%. FTSE indices are market cap weighted, which isn’t reflective of most private investor portfolios, so I prefer to benchmark against the equally-weighted, annually-rebalanced 90+ StockRanks, which are up 4.4%.

Naps Portfolio Performance

It’s within this muted backdrop that I compare the performance of the 2023 NAPS Portfolio. This is the “No Admin Portfolio System” that I’ve now been running here for 9 years.

It’s a simple, systematic investment strategy that takes no more than an hour to administer each year. There’s no stock picking, no reading of the runes and no emotional hemming and hawing.

It’s based on the principle that good, cheap, strong shares tend to beat the market - on average over the long run. So if you buy a diversified portfolio of these kinds of shares, you should do fine.

In essence, the algorithm is: Buy the 20 highest StockRank shares, diversified across ten sectors. Once per year, rinse and repeat. I’ve fiddled with the rules a bit over the years, probably to little gain, but the long term performance has been quite satisfactory with a 182% gain over 9 years.

The above charts do exclude dividends and transaction costs. Including dividends for the FTSE All Share gives the total return a boost to 60% over the last decade. Still a wide margin away with the NAPS having typically yielded dividends of over 3% annually.

Nonetheless a fairer comparison may be versus Actively Managed Equity funds in the UK, as if you can’t beat fund managers, there’s little point running your own money. While the NAPS only has 9 years history, it’s beaten the performance of all 187 funds in Trustnet’s “UK All Companies Sector” fund database over 10 years. Over the last 5 years, it's in 15th place. If there’s ever an advertisement for the benefits of DIY investing there it is. Our annual survey of subscriber performance suggests that so many of you do far better than this - congratulations.

Nonetheless, 2023 has been a pretty mediocre showing for the NAPS, recovering from a 9% loss in late October to a 1.9% return by year end. Over the last 2 years, the portfolio is down 13% and has underperformed the FTSE All Share. This has bothered me.

There’s not much you can do about the markets, but long periods of underperformance lead to mental anguish. The risk is that you throw in the towel on a proven approach, and go return chasing elsewhere. Never a wise move. So why have the NAPS underperformed of late?

It’s not exactly been a stellar set in 2023. Warpaint London (LON:W7L) has been a two-bagger, but there have been only 9 winners against 11 losers.

There are a fair number of nasties in the set. Steppe Cement (LON:STCM) down more than 50%, Keywords Studios (LON:KWS) suffering, while utilities, healthcare and telecoms, usually sources of defensive spine, were weak.

What’s most annoying is that the final day ranking shuffle on the 31st December last year swapped out Yu (LON:YU.) for Telecom Plus (LON:TEP) , an unfortunate late replacement that swapped a 145% potential winner for a 27% loser. Just that one wiggle in the ranking system left an additional 9% of gains on the table for the year.

That’s chance, but I do feel rather robbed.

Just how random are the returns of NAPS Portfolios?

The 9% Yu Group vs Telecom Plus portfolio swing just goes to show how variable StockRank portfolio outcomes can be. But just how variable?

There are 121 stocks in the 90+ ranking set in the UK at the moment, excluding tiddlers below a £10m market cap and the smattering of investment trusts. It’s unrealistic (and very expensive) to own all of them. Anyone using the ranks to build a portfolio, whether via discretionary stock picking or systematic approaches, invariably ends up owning a sample.

The NAPS owns 20 high-ranked stocks, which is a manageable amount of positions to run. But owning just 20 ensures the eventual performance outcome will differ considerably from the overall 90+ StockRanks.

To satisfy my own curiosity, without hopefully starving my cat, I built a little random portfolio builder to check out the distribution of NAPS-esque portfolio returns.

Here are the performance histories of 100 randomly selected high ranked NAPS-esque Portfolios, each diversified across 10 sectors in 2023.

The above line chart doesn’t show all the portfolios, but the average was a 1.4% return, the maximum was 27% and the minimum a horrible -15%. Thankfully the latter is a highly unusual outcome. The “standard deviation” was 4.8%, which essentially means that two thirds of the portfolios returned between -4.8% and +4.8% of the average. So two thirds of the portfolios returned between -3.4% and 6.2%. Smaller portfolio sizes (e.g. 10 stocks) would have a wider range of outcomes, while larger portfolio sizes (e.g. 50 stocks) would be narrower.

Here’s a better illustration of the distribution as a histogram. Apologies for non dweebs, but I love this kind of visualisation as it lays out the variety of outcomes more clearly.

The 1.9% return for this year’s NAPS has proven to be just above average. That’s a pretty fair outcome and I can’t complain. But one would hope that the NAPS construction process, which picks the highest-ranked stocks in each sector (rather than generally high ranked stocks), might skew the portfolio returns upwards in the distribution.

That’s certainly been the case historically. Back in 2015, the first year for the NAPS, the portfolio absolutely rocketed out of the blocks with a 43% portfolio performance. The average “NAPS-esque” portfolio for that year would have returned 15%, so 43% was perhaps a lucky outlier. Here’s hoping that 2024’s NAPS Portfolio benefits similarly!

The 2024 Portfolio

This will be the 10th year of the NAPS Portfolio, and it may well be the last. We are thinking carefully about whether to launch a well considered set of model portfolios across a range of investment styles. These are likely to be systematically guided and cover both capital growth and income preferences. I’d be very interested in the comments to know if this would be of interest.

The 2024 Rules

The last few years have seen the NAPS portfolio divert away from using the core StockRank (QVM) as its ranking method, towards a portfolio built half with high QM (quality and momentum) shares, and half high VM (value and momentum) Shares. I personally use the VM Rank a lot in my own portfolios as I like it’s brutality in finding unloved turnarounds. But a heavy momentum weighting is never ideal when recovering from the lows of a bear market.

So for this year I’ve decided to revert back to basics. We’ll be using the core QVM StockRank, with the following rules:

1. 20 stocks from all 10 sectors. No more than 1 utility and 1 telecom. Maximum of three in any other sector.
2. Minimum £10m market cap
3. Ranked by StockRank descending.

It’s easy to use the Screener or the Sector pages to compile a set of candidate stocks in this way. Rank by StockRank (or other rank) and start selecting stocks two by two from each sector as you go down the list.

It can be sensible to include a liquidity rule to avoid high bid-ask spread stocks if your portfolio size is large. I have in the past used a Spread < 500bps (5%). Metals Exploration and Renold in the list below are just above this cutoff, but with a median bid/ask spread of 0.21% it is a fairly liquid list.

The 2024 Selections

Please note that this educational content only - not investment advice. So please do bear all of this in mind. These are not recommendations. To reiterate, the NAPS process is a completely data-driven approach, without any discretionary choices in the selections. There’s no assessment of the suitability of these as investments for individuals and their preferences, risk tolerances nor their investment goals. So if in doubt, please seek advice.

In terms of diversity, the rules spit out 1 microcap, 6 small caps, 7 mid caps and 6 large caps. That’s a good spread, with some robustness from the large caps. Given my recent timing articles about a new uptrend in the FTSE AIM All Share, the more risk tolerant may be willing to skew more towards small caps.

Some of these shares are well researched by the community, in the Small Cap Value Report and third party publications. That’s quite satisfying as I like to see shares in the NAPS that discretionary stock pickers have growing interest in. Moreover, quite a few have been showing up in my “Multibagger 2x2x2” screening framework, which suggests the list has opportunity for margin and P/E multiple expansion.

Keelan Cooper has been kind enough to help write up some briefs of the 20 stocks below. Many thanks to him indeed.

Energy

Seplat Energy (LON:SEPL)

£730m Mkt Cap, Oil & Gas.

Nigeria-based oil producer, Seplat Energy, has been on a strong run in 2023. The company’s shares are up almost 25%, as it continues to grow its operations, pay large dividends, and generate substantial free cash flows.

Seplat produces just under 50,000 barrels of oil equivalent per day (9 months 2023 production of 48,152 boepd) from its operations in the prolific Niger Delta. As oil prices remain elevated, this has translated into $172 million worth of free cash flow so far this year (9 months). A price to free cash flow of 3.9, highlights just how impressive this cash flow generation is compared to a company of its size.

Whilst growing operational costs and a debt pile of $348 million on the balance sheet may be a cause for concern for some, at current oil prices, the company can comfortably keep making notable profits and paying down debts. Despite slightly lower oil prices, the net debt figure has dropped 23% from the same point in 2022.

As the company pursues growth via an expanded drilling programme in Q4 2023, and completes work on its ANOH gas plant, Seplat could be set for another strong year ahead should energy prices remain favourable.

Shell (LON:SHEL)

£167bn Mkt Cap, Oil & Gas.

Oil and gas behemoth, Shell, has outperformed the wider UK market this year, but the share price remains below its multi-year highs that is reached in mid-October 2023.

Shell’s share price pullback mirrors the recent fall in oil prices, but this hasn’t stopped the company from continuing to print cash. Scale economies are incredibly apparent in Shell’s operations. The company breaks even at an oil price of $30 per barrel, at $40 per barrel it’s able to pay a dividend and at $50 per barrel, it can carry out buybacks. At the time of writing, the oil price sits just below $80 per barrel.

In the company’s latest Q3 results, it announced that is would be commencing a $3.5 billion buyback programme over the next 3 months, meaning buybacks for H2 2023 would total a whopping $6.5 billion. When you add dividend payments into the mix, shareholder distributions are set to equal $23 billion in 2023.

Even though Shell plans to limit capital expenditure in the coming years and focus on controlling costs, new projects are estimated to bring an additional 500,000 barrels of oil equivalent per day of production online by 2025.

Basic Materials

Macfarlane (LON:MACF)

£186m Mkt Cap, Containers & Packaging.

Serial acquirer, Macfarlane, has demonstrated a unique ability to grow its operations both organically and inorganically over the last decade. The company has carried out 17 acquisitions since 2014, most of these being smaller bolt-on acquisitions, that quickly become earnings-accretive.

Its strategy has enabled it to become the market leader in the provision of protective packaging materials in the UK. The company generates annual sales of just under £300 million from its products and has managed to consistently grow its profits and earnings every year since 2012.

The shares have crept up only slightly in 2023, and remain attractively valued at a price-to-earnings ratio of 9.4. The 5-year average ROCE and ROE of around 15% imply that a higher valuation may be warranted by the market in the future.

Macfarlane’s recent acquisitions of Suttons (Feb 2023) and Gottlieb (April 2023), along with its European operations, are providing an additional boost to sales as the company disclosed that it is facing a period of subdued demand in the UK in its half-year 2023 results. Nevertheless, profits for the full year 2023 are expected to come in as forecasted.

Metals Exploration (LON:MTL)

£55m Mkt Cap, Metals & Mining.

Metals Exploration was one of the top mining performers on the UK market in 2023. The company’s shares have doubled in value since the start of the year, as it feels the full benefits of stronger gold pricing and growing production from its operations at the Runruno mine in the Philippines.

The company announced record operating profits in H1 2023, reaching $31.1 million, up from $9.4 million over the same period in 2022. Metals exploration is now on track to produce between 78,000 and 81,000 ounces of gold in 2023, at an all-in-sustaining cost of around $1,160 per ounce. At current gold prices, the company is making a margin of just over $900 per ounce.

Indeed, the incredibly profitable operating environment means that the company is forecast to earn just under $60 million in profits this year. At the current market capitalisation, this suggests a price-to-earnings ratio of just 2.2 for Metals Exploration, making it one of the cheapest stocks on the market.

There are always larger risks inherent in investing in small-cap mining companies, but the risk vs reward seems to be stacked in favour of the latter in 2024.

Industrials

Costain (LON:COST)

£175m Mkt Cap, Construction and Engineering.

Founded in 1865, Costain Group is one of the leading infrastructure solutions companies in the UK. The company develops pioneering solutions that transform the performance of the infrastructure ecosystem across the UK’s energy, rail, water, transportation, nuclear, and defense markets.

Costain has enjoyed an excellent 2023, which has been reflected by the share price rising 70% since the start of the year. Due to the strength of the company’s operating performance in H1, where operating profits increased 7.1% and the order book visibility became clearer, Costain has also discussed resuming dividend payments.

Another key milestone for the company over the last year was the triennial review of the pension deficit, which has led to substantially reduced payments. The overall fundamental picture for Costain now looks more promising, and a Piotroski F-Score of 8/9 is testament to this.

The key attribute that is worth closer attention is the company’s ever-growing cash pile, which now stands at £132.1 million, or roughly 75% of its entire market capitalisation. Indeed, the company’s operating margins of 2.3% don’t give it much leeway should the economy take a turn for the worst, but the mountain of cash on the balance sheet provides a notable margin of safety for investors.

Vesuvius (LON:VSVS)

£1.3bn Mkt Cap, Machinery, Equipment and Components.

Molten metal flow engineering and technology specialist, Vesuvius, has seen its share price rally by almost 20% since mid-November, on the back of a strong trading update.

The company, which primarily serves the steel and foundry industries, announced that it was on track to meet its full-year targets after it had successfully differentiated its product offering, made market share gains, and maintained resilient pricing. This is evidenced by the company’s excellent quality characteristics, with a near-perfect overall Quality Rank of 98.

As a global leader in its field, Vesuvius invests plenty into R&D each year, operating six hubs around the world. The company’s technological prowess enables it to simultaneously optimise pricing and gain market share, revealing signs of moat factors. Vesuvius is targeting profitability (RoS) margins in excess of 12.5% by 2026.

While steel and foundry markets outside of India have experienced softer demand in recent months, Vesuvius believes that its investment in expanding production capacity in India, Eastern Europe, and Mexico over the past two years will place it in a good position to serve the forthcoming steel market growth.

Renold (LON:RNO)

£79m Mkt Cap, Machinery, Equipment and Components.

Renold is one of only a handful of companies on Stockopedia with a 100 StockRank. The company, which manufactures high-precision industrial chains and related power transmission products, boasts excellent all-around fundamentals.

Renold has managed to outperform the FTSE All Share by 56.8% this year, in line with the growth it reported in its operating profits. Its latest interim results highlighted a 56.3% increase from the prior year to £15 million. Net debt also fell slightly to £28.3 despite the bolt-on acquisition of Davidson Chain in Australia.

Furthermore, the company’s pension deficit, which was previously a cause for concern for investors, has been reduced to £52.7 million. All of these improving attributes are reflected in its fundamentals. For example, by a price-to-sales ratio of 0.31, or a return on equity of 36.3%, or by the analyst forecast chart, which shows sharp upward revisions to EPS estimates.

As the second largest industrial chain manufacturer in the world with a <10% market share, Renold certainly possesses a certain savoir-faire. In his book, “Hidden Champions of the 21st Century”, the business consultant Hermann Simon discusses the idea that small to mid-sized firms, which operate in niche markets and are market leaders in their industries, tend to become very successful. Renold shares many such characteristics.

Financials

Bank of Georgia (LON:BGEO)

£1.8bn Mkt Cap, Banking Services.

FTSE 250 Bank of Georgia Group, a standout performer in 2023 NAPS Portfolio with a 51% gain, revisits for 2024. BGEO Group split in 2018 into a pair of listed UK stocks - BGEO (a pure play banking entity) and Georgia Capital (a diversified investment vehicle) which have both performed well. The bank has established itself as a dominant force in Georgia’s retail and corporate banking sector, vying with TBC for leadership with a third market share.

Georgia's robust economy, bolstered by GDP growth exceeding 10% annually in recent years and unique free trade agreements with both the EU and China, provides a fertile ground for the bank's growth. Strategically located between Europe and Asia, BGEO benefits from an increasingly liberal market environment and ongoing reforms aimed at deeper European integration.

Its strong Q3 2023 performance, highlighted by a 23% increase in profits and a remarkable 31% return on equity, underscores its financial strength. Additionally, the bank's focus on digital innovation, including a "Financial Super App," coupled with a strategic share buyback program and solid capital distribution, further solidifies its position as a leading banking institution in the rapidly expanding Georgian economy.

TP Icap (LON:TCAP)

£1.5bn Mkt Cap, Investment Banking & Investment Services.

A frontrunner in global financial markets infrastructure, TP ICAP is renowned as the world’s largest inter-dealer broker in energy and commodities, with subsidiaries like Parameta Solutions providing OTC derivatives pricing data, and Liquidnet in dark pools.

The company’s strategy orbits around three key objectives: “business transformation” - especially deploying its new integrated Fusion electronic platform; “diversification” into emerging markets like renewables and digital assets; and “dynamic capital management” with commitment to freeing cash to return to shareholders via a 50% payout ratio.

ICAP seemed to overpay when it bought Liquidnet, in September 2021 for $700m, which became a drag on the share price, and shareholders are now pushing ICAP to spin off Parameta Solutions. Parameta is reputed to be worth the entirety of ICAP’s £1.5 billion market cap, which, if true, suggests the rest of ICAP comes in the share price for free.

In his speech at Mello, Lord Lee talked about the fact that you can’t go too wrong buying stocks at the “devils double” with a P/E below 7 and Yield above 7. TP ICAP on a forward P/E of 6.9 and Yield of 7.2% fits the bill.

Consumer Cyclicals

Redrow (LON:RDW)

£2bn Mkt Cap, Homebuilding.

FTSE 250-listed housebuilder Redrow saw its share price soar 25% over the last 2 months as inflation has started falling more quickly than anticipated, which could lead to the Bank of England deciding to reduce interest rates early next year. Most UK housebuilders have finished the year on a similarly strong note, with expectations that we’ve now seen the end of quantitative tightening.

Whilst it has been a difficult period for housebuilders dealing with higher build cost inflation and reduced demand due to the more burdensome interest costs of mortgages, it looks like Redrow has dealt with the challenges quite well.

Redrow was able to return £133 million in the form of a share buyback and interim dividend paid to shareholders in 2023. Its return on equity stood at 19.9% for the full year, demonstrating its excellent quality characteristics even in difficult times.

The company’s latest AGM update in November 2023 highlighted weaker trading than expected during the Autumn period. However, it still expects to meet its profit before tax target of between £180m and £200m and have over £150 million in net cash at the end of June 2024.

Card Factory (LON:CARD)

£370m Mkt Cap, Specialty Retailers.

Card Factory, the FTSE Small Cap cards, gifts and party supplies retailer, has demonstrated remarkable resilience and growth since the challenges of the pandemic. Through 2022, the company's sales surged 27% to £463m, with pretax profits and EPS seeing significant increases. Card Factory’s vertical model, in which it manufactures all its own cards from its UK operations, somewhat protects it from supplier issues. Under CEO Darcy Willson-Rymer, the company's expansion into the gifting sector is just beginning, complementing an already strong greeting card business.

While growth in 2023/24 is more moderate, Card Factory's potential in gifting and international wholesale partnerships, particularly in the US, shows promising potential. Willson-Rymer's ambitious target of £650m in sales by 2027, supported by significant technology investments, positions Card Factory for continued success. It was able to navigate the pandemic with no additional fundraising and thus no share dilution for investors. With revenues now ahead of its pre-pandemic peak, and profits returning to those levels, a share price at a third of its 2015 peak seems anomalous.

Major Shareholder Teleios Capital Partners has been reducing their stake, which may be a headwind to the share price, but a P/E Ratio of 8x forecast earnings seems too low for a good business.

Smiths News (LON:SNWS)

£126m Mkt Cap, Media & Publishing.

Smiths News, which can trace its origins back to 1792, when it first started delivering the nation’s newspapers, has finished the year up around 8.5%. However, as my colleague Oliver Cooper recently pointed out, there has been a notable breakout in terms of volume. The average daily volume over the last 10 trading days is 147% above the average volume traded over the last 3 months, which could indicate a strong start to 2024 for the company.

Smiths News has done an excellent job of creating efficiencies and improving margins over the last few years, to mitigate the impact of the structural decline of sales volumes in the UK’s newspaper and magazine market. As a result of the changes it has made, which included the disposal of loss-making assets, it has managed to turn a profit in each of the last 3 years.

Despite a notable lack of forward-looking growth, the company looks exceptionally cheap on a variety of valuation metrics. A price to free cash flow of 3.8 and prices to sales of just 0.11, imply that there could be a unique value opportunity at play. Furthermore, a forward dividend yield of 7.94% might provide an added incentive for income investors.

Consumer Defensives

Marks and Spencer (LON:MKS)

£5.4bn Mkt Cap, Food & Drug Retailing.

One of the best success stories on the London Markets in 2023, Marks & Spencer has seen its shares advance by a staggering 115% after it started the year trading at 126p a share. It’s been a remarkable turnaround for M&S, which has managed to increase revenues, cut costs, and drastically improve profitability in a very short space of time.

Central to these efforts has been its focus on expanding and further improving the quality of its food range. In the company’s latest H1 results, published in November 2023, it announced that food sales were up 14.7% year on year, far outperforming its mainline competitors. M&S has been able to gain market share as a consequence.

M&S has also worked relentlessly at reducing structural costs across the business, delivering £100 million of cost savings in H1 and aiming for £400 million in total savings by FY 2028. This can now be seen by its industry-leading quality metrics.

The increased profitability and free cash flow generation mean that the company can now focus on reducing its debts, restoring its dividend, and continuing to reinvest into the business, including its Ocado operations. Let’s see if M&S continues on its strong trajectory in 2024, analyst forecasts certainly seem to think so.

Greencore (LON:GNC)

£459m Mkt Cap, Food & Tobacco.

Greencore, a leading Irish manufacturer of convenience foods, reported strong financial results in November 2023. Despite exiting low-margin business, the company achieved volume growth ahead of the market average, with adjusted operating profit reaching £76.3 million in FY23, equivalent to a 5.7% increase. The strategic focus on stabilizing the business and rebuilding profitability was marked by the completion of "Horizon 1" objectives and the transition to "Horizon 2."

Cost control measures and efficient operational initiatives enabled Greencore to navigate input cost inflation successfully. The company's net debt to adjusted EBITDA reduced to 1.2x, and return on invested capital (ROIC) increased to 8.9%. A continued share buyback program reinforces the commitment to returning £50 million in value to shareholders.

Greencore's diversified operations, with 23 manufacturing units and a robust distribution network, supply major UK supermarkets (like Tesco’s, M&S, and Aldi), convenience outlets, travel retail, discounters, and more. The company's strategic pillars for growth include broadening its product proposition, deepening customer relevance, and achieving further differentiation.

Despite market challenges, Greencore remains confident in delivering within the range of current market expectations for FY24. The company's shares were up nearly 50% in 2023, as its improving fundamentals and positive price momentum gained speed.

Healthcare

GSK (LON:GSK)

£59bn Mkt Cap, Pharmaceuticals.

Biopharmaceutical giant, GSK, reported some impressive performances from its diverse product portfolio in the company’s latest Q3 results. Total sales grew 10%, and there was a commendable 33% increase in vaccine sales, particularly driven by the successful launch of Arexvy, the world's first RSV vaccine.

GSK’s commitment to innovation is evident in its R&D investments, which were worth £5.5 billion in 2022. The company continues its focus on key therapeutic areas like infectious diseases, HIV, respiratory/immunology, and oncology. Its wide-ranging portfolio generated £29.3 billion in medicines and vaccine sales in 2022, and it continues to fortify its position with a robust pipeline boasting 18 assets currently in phase III/registration.

CEO, Emma Walmsley, recently re-iterated that GSK's progress in vaccines, combined with its ultra long-acting HIV portfolio and respiratory prospects, point towards a bright long-term outlook for the business.

Indeed, the company now believes that EPS is set to grow by 17 to 20% (up from 14 to 17% before) for FY 2023. Despite GSK’s exceptional growth, momentum, and quality metrics, its share price remained relatively flat this year.

Hikma Pharmaceuticals (LON:HIK)

£3.9bn Mkt Cap, Pharmaceuticals.

Hikma Pharmaceuticals is a global pharmaceutical company with operations across three key segments: Injectables, Generics, and Branded. In its November 2023 trading update, the company reported robust performance, particularly in its Branded and Generics businesses, prompting an upgrade in full-year guidance. The Injectables segment also witnessed decent growth globally, with notable expansion in MENA, Europe, and North America, overcoming short-term supply constraints. Despite these challenges, the company is investing extensively to enhance manufacturing capacity and product pipelines.

The Branded business is experiencing strong demand, especially for chronic illness treatments in MENA, offsetting currency devaluation and facility closures that have slightly impacted profitability. Hikma's half-year results in August 2023 showcased an 18% revenue increase, a 35% surge in core operating profit, and a robust balance sheet.

The company recently appointed a new CEO, Riad Mishlawi, who is now leading efforts to expand manufacturing facilities, launch new products, and reinforce its position in oncology medicines. Despite positive results and an optimistic outlook, the market response has been subdued since the November trading update, presenting a potential opportunity for investors given the company's low price-to-earnings ratio of 10.6.

Technology

Computacenter (LON:CCC)

£3.4bn Mkt Cap, Software & IT Services.

Founded in 1981 by British entrepreneurs Peter Ogden and Philip Hulme, Computacenter has emerged as a leading global technology and services provider, listed on the London FTSE 250. The company enjoyed a stellar 2023, as its share price climbed by 44.5% to reach highs not seen since April 2022.

H1 2023 results illustrated a robust 26.8% growth in revenue, setting the stage for the company's 19th consecutive year of adjusted earnings per share growth. Impressively, Computacenter has managed to achieve a 3-year EPS compound annual growth rate of 16.1%. A focus on strategic initiatives and a reduction in inventory have also contributed to a strong balance sheet and net cash position, reinforcing its financial strength.

The recent Q3 2023 trading update also aligns with expectations, showcasing robust performances in Germany and the US. Despite facing challenges in the UK, Computacenter maintains optimism for FY 2023, anticipating sustained profitability growth and the expansion of market share. The company's commitment to long-term resilience, strategic investments, and consistent growth positions it as a distinctive opportunity within the UK technology landscape.

Ingenta (LON:ING)

£20m Mkt Cap, Software & IT Services.

The minnow of this year’s set at only a £20m market cap, Ingenta is an Oxford based publishing services provider that’s been listed for decades. It provides content production, delivery and commercial management software and services to publishers across academic and trade verticals. The group is actively targeting expansion into the music, gaming and media markets where it perceives its IP and royalty management expertise as being valuable. Recent contract wins show some green shoots.

Management have achieved £4 million in cost reductions since 2017 to turn the group sustainably profitable, with £11m in sales and 80% recurring revenue generating high returns on capital, profits are forecast at £1.8m this year.

As a niche business, offering often bespoke solutions and consultancy, the growth potential may be perceived as limited. No borrowing, 80% recurring revenues, and client relationships spanning decades do give comfort though that the business is sustainable. Nonetheless, it is moderately valued, dividend-paying and buying back shares. The business progress has seen the share price triple over the last few years. Seems too small to be listed, could it be acquired?

Telecoms

Airtel Africa (LON:AAF)

£4.9bn Mkt Cap, Telecommunications Services.

Airtel Africa, the second-largest telecom operator in Africa, has reported robust H1 2024 performance, showcasing its leading position in the telecommunications and mobile money sector. With a customer base of 147.7 million, including 59.8 million data customers and 36.5 million Airtel Money users, the company has experienced 23 consecutive quarters of double-digit revenue and EBITDA growth. Notably, in H1 24, Airtel achieved a 19.7% revenue growth in constant currency, driven by the expansion of its 4G services across all 14 markets.

The company's strategic focus aligns with the demographic trends in Africa, capitalising on a young and growing population, urbanization, and limited infrastructure. Airtel Africa aims to reduce the digital divide and enhance financial inclusion by delivering affordable telecom services and fostering digitalisation uptake.

The company's growth strategy encompasses network enhancement, distribution expansion, and maximising the value of data-based services and mobile money. Despite foreign exchange headwinds, the financials continue to demonstrate resilience, with EBITDA growing by 20.7% on a compound annual growth rate over the last 5 years.

Whilst the late Jim Slater said that “elephants don’t gallop”, this large cap trades on a price to earnings growth ratio of 0.8, and has strong price momentum over the past month.

Utilities

Good Energy (LON:GOOD)

£63m Mkt Cap, Electric Utilities & IPPs.

Good Energy, the renewable energy services supplier, has sprinted out of the blocks in the last few months as its share price doubled. Some recent windfall energy trading profits, due to smart wholesale costs hedging, boost the cash balance to £34m which is more than half the market cap. This values the rest of the business, excluding cash, on less than a P/E of 7. The company does warn that these H1 windfall profits are temporary and losses will accrue in H2, but nonetheless the future could be optimistic for GOOD.

The company is changing strategy away from energy supply (for which regulations require low margins) and into higher margin, and higher growth, energy services. These include solar installations in a market that’s forecast to grow at 10% annualised to 2030, but also heat pump installs which may be set to accelerate. It also owns Zap-Map which is the leading electric car charge point app in the UK, independently valued at £15m or so with a million downloads and almost £2m ARR.

The company is positioning itself to acquire regional players to scale its installation services, and benefit on the backend post-installation via tariff, monitoring and finance packages. As with all small caps, plenty of execution risks, but with increasingly green-conscious energy consumers Good Energy has a growth market to play in.

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Wishing everyone a prosperous 2024!