Shares to buy, hold and sell: Philip Matthews

6 December 2011

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.

Philip Matthews is the manager of the Jupiter Growth and Income fund. His style is to aim for the perfect blend of good value and high quality in the shares he invests in.

The fund has been a long-term top performer, having beaten the sector average in all but one of the five years since Matthews took over in 2006. Here are the latest stocks he's bought and sold for the Growth and Income fund, and the one he's holding on to.


"We are looking for a combination of value and quality when we research stocks. In many cases this will lead us to companies that are high quality, but are having a difficult period for some reason. With this in mind, we have recently been investing in Smith & Nephew.

"It is a medical devices company involved in orthopaedics, endoscopy and 'wound management' (which in practice means special gels and films to aid healing). The share price has fallen from 742p in February of this year to its current level of 571p. It is now trading below its historic average valuation and has also underperformed the healthcare sector.

"But Smith & Nephew is generating high and, more importantly, sustainable margins, despite experiencing a period of anaemic growth due to expensive surgical procedures being delayed as the NHS struggles with budget cuts.

"We believe the firm's negatives are more than reflected in earnings expectations and the current valuation."


"After the oil spill in the Gulf of Mexico, we took a large position in BP, and it is still our largest holding.

"We bought it largely on valuation grounds. The share price simply got so low after the incident that the very worst-case scenario - BP accepting full responsibility, being given the maximum fine and not getting any money back from its joint venture partners - was priced into the stock. Even in this worst-case scenario, BP was simply much cheaper than everything else.

"Since then, the valuation has moved relatively little and so we still believe it has further to go. The firm is still extremely cash generative and - even including the continued impact of the Gulf of Mexico disaster - has generated $15.9 billion (£9.9 billion) in cash since the start of this year.

"Despite the fund's income focus, we were happy to buy into BP while it was not paying a dividend. We felt it was likely to be a temporary state of affairs and so it proved; the company restored its dividend in February. BP also suits the overall defensive focus of the fund." 


"IMI is a global engineering group and a leader in its field. In 2009, we were attracted to industrial companies tied into the economic cycle when they were extremely out of favour. Investors were worried that their earnings would plunge in an economic downturn. In our view, these companies were set to recover.

"A number were selectively added to the portfolio, including IMI, which fulfilled our quality criteria as well. However, more recently these so-called 'industrial cyclical' businesses, particularly those with overseas earnings, have become fashionable and valuations have recovered to the extent that they now trade on a premium to the rest of the market.

"We started selling IMI at £8; it went up to £11, but has come back to around £8 since then. The reason for this was that earnings expectations had moved from being extremely pessimistic at the point we bought the shares to being far more optimistic at the start of 2011.

"If we've bought into a company on valuation grounds, but it moves to a higher valuation, the natural route as a fund manager is to question whether it is still right to hold the stock. I constantly challenge why I am holding a particular stock or whether there's a better opportunity. Selling down IMI was part of that process."


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