10 high quality growth stocks that rode out the market dip
After the recent bout of market volatility, it's clear that some stocks were much more resilient than others. Even on the small-cap indices, which are more sensitive to market shocks, some shares brushed off the drama. A number of them fitted the sort of investment profile favoured by the successful fund manager, Giles Hargreave. So what does he look for?
Hargreave is renowned for his small-cap stock-picking ability. As the chairman of money management firm Hargreave Hale and lead manager of the Marlborough Special Situations fund, he knows more than most about smaller quoted companies.
As he's explains: "It's just so obvious that with a small company you can make money a lot faster in percentage terms than with a big company - you've got a real chance. You can buy stocks that go up three or four times quite quickly, but you're unlikely to do it with larger FTSE (UKX) stocks."
Diversification and a focus on high quality
Over the past five years, Hargreave's flagship fund has generated a near 118% return. Part of that success is down to the way it deals with the risky nature of small companies. Naturally, his team look for good quality, financially resilient growth stocks. But to shield their investors from one-off disasters, the fund holds as many as 200 stocks, and sometimes more.
Hargreave believes this kind of wide diversification virtually guarantees that his fund will hold the small handful of stocks that go on to be very, very successful. By contrast, a fund manager with 20 stocks and 5% in each is either going to do spectacularly well or spectacularly badly. Hargreave isn't trying to do that - he looks for relatively low volatility and relatively good performance.
For individual investors, spreading risk by diversifying across a couple of hundred positions is not realistic. But there are still valuable lessons to take from Hargreave's successful approach. By focusing on higher quality, profitable growth shares, he's potentially less prone to volatility in small cap indices.
Here's a broad idea of what a high quality, small-cap strategy looks like:
● Positive earnings-per-share (EPS) that have been growing by more than 10% compounded over three and five years.
● Return on Capital of more than 12%.
● Net Margins are increasing year-on-year.
● Positive relative price strength.
● A constituent of the FTSE SmallCap or AIM All-Share index (AXX).
Here are some of the companies that are currently passing those rules:
|Name||Mkt Cap £m||PE Ratio||EPS 3 Year Compound Growth %||1 Month Relative Price Strength||Sector|
Increased volatility in the first couple of weeks of February saw the FTSE SmallCap and AIM All-Share Indices falle by around 4.5%. But as this list shows, not all stocks have suffered the same stomach-churning drawdowns.
This higher quality approach picks up some well known smaller company success stories - and the high valuations in places do reflect that. Yet these companies all have a track record of compounding earnings growth. Plus their share price strength in the market over the past months suggests that many have held up well against the volatility.
Among the larger companies passing these 'high quality' rules are investor-favourites like ASOS (ASC) and Keyword Studios (KWS). But overall, the list is led by the aviation service group Gama Aviation (GMAA), followed by Amino Technologies (AMO), Numis (NUM), Tristel (TSTL) and CMC Markets (CMCX).
Hargreave has said that a key to his fund's success is that it gets more right than wrong and when they do go wrong he tends to get rid of them. The focus is very much on running winners and selling losers. For individual investors, the focus on quality and diversification in small-caps with the potential for large and rapid gains is an investment template that could be worth taking further. Smaller companies can be unpredictable, and careful research is essential. But in the right areas of the market, the returns from this strategy can be impressive.
Interactive Investor's Stock Screening series is written by Ben Hobson of Stockopedia.com, the rules-based stockmarket investing website. You can click here to read Richard Beddard's review of Stockopedia.com and learn more about the site.
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It's worth remembering that these and other investment articles on Interactive Investor are simply for generating ideas and if you are thinking of investing they should only ever be a starting point for your own in-depth research before making a decision.
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About the Author
Ben Hobson is Investment Strategies Editor at Stockopedia.com. His background is in business analysis and journalism. Ben researches and writes regularly on investment strategy performance and screening ideas for Stockopedia.com. He is the author of several ebooks including "How to Make Money in Value Stocks" and "The Smart Money Playbook"
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