Axa Framlington’s mid cap drivers – service, survivors, tech change, supply side constraint

11th July 2013

Axa Framlington Mid Cap fund manager Chris St John has outlined four themes which are driving his stock picking decisions and a stock to illustrate each one.

Service, service, service

“Many underestimate the importance of service, but when a company gets this right it can add significant value. We look for companies that provide excellent service, wrapped around a strong product offering. One example is Spirax-Sarco, who produce boiler and pipeline valves for controlling the flow of steam and industrial fluids.  For a chemical plant the capital cost of these controllers is negligible when compared with the capital cost of the plant itself. However, a far more significant sum is the opportunity cost incurred if the plant stops producing because one of these controllers breaks. In this event, the speed at which a replacement can be fitted is crucial.”

UK survivorship

“There are a number of UK stocks that have benefitted from the downturn. A prime example of this is Sports Direct, the market leading sports retailer. Sports Direct has managed to capitalise on the demise of competitors, such as JJB Sports, increasing its market share. We believe that this will in turn allow the company to grow its profit margins over time, thereby helping to fund future expansion into Europe.”

Technological change

“Rightmove, the property search website, is a company that has profited from the growing use of, or even reliance on, the internet. Rightmove has established a fantastic market position and developed a dominant market share. House buyer and seller preference means that estate agents now risk losing business if they do not use the site, giving Rightmove great pricing power. The business has strong cash flows and a low level of capital expenditure required for expansion.

Supply side constraint

“Ashtead, the equipment rental group, has taken market share during the economic slowdown. It has been able to take advantage of the comparatively weak competitive position of other industry participants, given its strong financial standing and younger fleet. We expect the company to benefit from both the cyclical recovery in the US construction market and secular growth as construction companies outsource more of their equipment requirements to companies such as Ashtead.”

Chris St John adds: “The FTSE 250 is an attractive asset class with many enduring qualities. It is a dynamic and diverse universe that offers opportunities to invest in companies with significant earnings growth and provides access to both domestic and global growth prospects. Even in the dark days of 2008, ten companies within the FTSE 250 provided a total shareholder return in excess of 20 per cent, suggesting that this is an area offering great opportunities for stock pickers to add value.”

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