It is traditional as we head into the festive season for brokers to give their top tips for the coming year.
However, one firm has taken the idea and run a little further with it.
Brewin Dolphin is on the hunt for long-term winners – stocks it expects to deliver stellar returns over the next four years.
Magnifying returns: The broker has hunted down stocks that should perform well during the next four years
I like the idea because it fits with my own philosophy of investing for three to four years, which gives the directors the time to deliver strategic vision for the company.
This is particularly true for smaller businesses that are often working to a long-term plan such as developing a mine, a new drug or revolutionary piece of technology.
Looking beyond 12 months is also very sensible in the current market as 2012 looks set to be just as turbulent as the year as the one we are leaving behind.
‘Whilst volatility is likely to persist in the near term, this will likely present opportunities to purchase high quality stocks at discounted valuations,’ said Michael Parkinson, Brewin’s head of research.
In all, the broker has identified 15 stocks it expects to be top of the pile in 2015 – the year the Rugby World Cup comes to England.
The first thing to point out is the market value of the companies averages around £500m.
So they are big business, but not so big that they have no room to grow.
More importantly, they are not so small that they will be sucked into vortex that is the market for smallcap stocks, which has been hit disproportionately by the recent market turbulence.
Look in closer detail and you find Brewin’s favourite firms are all sitting on double digit profit margins that are unlikely to be eroded over the investment period.
The broker asserts that ‘quality comes at a price’, so its top stocks have an average valuation of just shy of 15 times 2012 earnings.
The FTSE 100 is trading on a priceto- earnings ratio of 13. So we are shopping at John Lewis rather than Harrods.
Each of the companies has a solid balance sheet and positive free cash flow, and it has a track record of success.
‘Obviously, historic performance is no indication of future results but, more often than not, it does provide a strong indication of a company’s ability to continue to outperform,’ Parkinson said.
‘The majority of our chosen stocks have strong growth records and crucially, this has been backed by cash generation.’
The share prices of Brewin’s selected stocks have grown on average at a compound annual rate of 10 per cent for the last four years and four of them have increased by 20 per cent ‘supporting our belief that it is often sensible to back your winners’, the broker added.
As you can see from the accompanying table, Brewin has compiled an eclectic list of investments that covers the food, technology, outsourcing and natural resources sectors.
However, each has a particular attribute that marks it out as a winner. Certain firms have been chosen because they have withstood, adapted and possibly prospered in recession.
Others have the seeming ability grow whatever the backdrop. And there are one or two stocks on Brewin’s list where the potential is not fully appreciated by the markets.
Parkinson said: ‘We believe the companies featured all have the potential to be materially bigger businesses over time and all have strong market positions.
‘Where possible we have identified potential specific catalysts such as the recent introduction of new products that will produce results over time, synergies being seen from recent acquisitions, new territories being entered, new facilities increasing capacity, cost cutting initiatives or new technology st reaml ining processes.’