Shares to buy, hold and sell: Daniel Nickols
Daniel Nickols has managed the £487.2 million Old Mutual UK Select Smaller Companies fund since January 2004. He is fourth out of 46 managers in the sector, having delivered 74.5% for investors over the past five years, employing a flexible, stockpicking style.
Nickols also heads Old Mutual Asset Management's highly regarded small and mid-cap team. He believes smaller companies will continue to thrive. "We subscribe to the view that the world will continue to recover and the greater proportion of smaller companies are still to benefit," he says.
BUY: IMMUNO-DIAGNOSTIC SYSTEMS HOLDINGS
"Vitamin D levels have become an increasingly important marker of overall health, with implications for the risk of some cancers, bone and cardiovascular diseases.
"As a result, testing for it has become increasingly common. Immunodiagnostic Systems Holdings (IDS) has the most sensitive and accurate test for Vitamin D and it's leading the market.
"The company continues to have some big opportunities ahead of it because this is such an immature market space. At the moment, the group has around 170 machines around the world. But at its current rate of placement, it thinks that could be as many as 1,000 within five years, and we believe that's realistic.
"Unlike many stocks at the moment, this is already a developed world story. The bulk of its sales are in the US, France and Scandinavia, with the US as its key market.
"Growth has been very rapid, with earnings growing at around 50% per year. Looking forward, it can almost certainly sustain a rate of growth of at least 30% per year. Yet its share price is only around 15 times its forward earnings. It's very attractively rated and we think it can beat its current forecasts."
"This group has a market capitalisation of just £250 million. It distributes mechanical parts and associated services for the upkeep of production machinery. Its key areas of focus are Germany, France and the UK.
"It has a number of things that make it interesting: firstly, the market in which the group operates is very fragmented. It has a 3% market share and yet it's the market leader. This means that it can grow in an unconstrained way.
"Also, for companies such as Coca-Cola, the fewer suppliers they can use the better. Brammer can capitalise on this, so there is a secular growth dynamic.
"There are plenty of good reasons to think that the company can deliver top-line growth of 15% - and maintain it. It's putting a renewed focus on key accounts and, as such, may be able to grow faster still, possibly delivering sales growth in the mid-to-high teens.
"At Old Mutual, we employ a flexible process, rather than aiming to align ourselves with a specific type of stock such as 'value' or 'growth'. At the moment, we are trying to find high-quality cyclical stocks that are benefiting from recovery or companies with some secular growth. Brammer fits both of these criteria.
"The shares have performed very strongly this year. Yet when we look at the 2011 forecasts, the market is expecting earnings of around 17p per share. We think it can easily make 18-21p and this should prompt a gradual re-rating of the stock. It can legitimately grow at 20% per year if these dynamics play out."
"We have recently sold Halfords from our smaller companies fund. When we looked at all the group's sales lines, we realised each one was under pressure.
"It has three main strands to its business: satellite navigation systems, bikes and car maintenance. It has seen significant growth from satnavs and in-car entertainment, but this has run its course. Equally, bikes had a big boost with cycle-to-work schemes, but these have now been dramatically scaled back.
"It also has its reliable car maintenance side, but this too is seeing some competitive pressure. The Autocentres acquisition focuses on car servicing, but it has modestly underperformed.
"The company has worked to make headway through better sourcing and better buying, but that strategy also feels like it's under real pressure now.
"If Halfords is to meet growth profits meaningfully, it will have to look at cost lines. It has been downgraded already and we think it will see further downgrades. At nine times earnings it's not necessarily expensive, but if it sees further downgrades, the share price will continue to be under pressure."
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
A way of valuing a company by the total value of its issued shares and calculated by multiplying the number of shares in issues by the market price. This means the market capitalisation fluctuates continually as the value of the shares change in the market. For example, HSBC has 17.82bn shares in issue at a price of 646.2p making a market capitalisation of £115.15bn.