Ketan Patel, co-manager of the EdenTree UK Equity Growth fund alongside Philip Harris since 2016, says he tends ‘to avoid speculative growth or “blue-sky” companies’. ‘We prefer growth firms driven by profitability, underpinned by robust balance sheets and low capital requirements,’ he adds.
Patel describes EdenTree UK Equity Growth as a ‘multi-cap fund with a small-cap bias investing in UK equities, particularly those outside of the FTSE 100’. He and Harris ‘seek opportunities in unloved companies with low price/earnings (p/e) ratios, but with great growth prospects.’ They look for ‘quality companies offering a range of earnings growth profiles superior to the market’.
The fund has produced a 10.9 per cent return over the past year to 5 March; its benchmark, the FTSE All-Share index, has produced a one year return of 1.65 per cent.
Buy: Applied Graphene Materials (LON: AGM)
Patel purchased Applied Graphene Materials just as it was starting to move to its commercial phase. He bought near the end of last year when the company was raising capital following a decline in share price, at 36p a share. Since then it has started to rebound, standing at 48p per share as at 5 March, though it remains a long way from its peak of around 200p shortly after its public listing in 2013.
Applied Graphene Materials is a bet on disruptive technology, says Patel. ‘Graphene has been a long time in getting to the commercial stage.’ It was ‘a spin-out of Durham University and now has strong intellectual property, with patents secure in Japan, Europe and the US’. The application of new disruptive materials also provides the business with high barriers to entry, says Patel. Such materials involve ‘significant challenges to produce, disperse and format for customers’.
The company has a strong pipeline of projects, including ‘a first approval underway at Airbus,’ he reports. The firm’s management team is ‘highly experienced with a track record of value creation,’ having previously been employed at ICI, Croda and IP Group.
Hold: FeverTree (LON: FEVR)
There are some companies that will forever haunt investors who failed to buy when they first went public, as a missed opportunity. FeverTree is one of them. Since its IPO in 2014, FeverTree’s share price has surged by over 1,500 per cent. EdenTree UK Equity Growth, however, bought in at the time of the IPO.
Since then the firm has managed to maintain its strong presence and keep growing. In 2017, Patel notes, the company’s UK revenue rose by 96 per cent – that was despite its brand rival Schweppes embarking on a relaunch. FeverTree, he adds, still has 39 per cent of market share. However, he is not tempted to sell and take profit off the table just yet, as he is still optimistic about the company’s potential. ‘The story is more beyond the UK,’ he says. ‘It now sells more outside of the UK.’ US sales growth now stands at 20 per cent a year, and growth in Europe at 30 per cent.
This global expansion means FeverTree, despite its extraordinary performance so far, still has plenty of growth left in it. So why not buy more? Patel notes that the stock is already a very sizeable holding in the fund, accounting for over 3 per cent of total assets. It is also, as it stands, very expensive, with a p/e ratio of 60x – although that’s down from its former high of 200x.
Sell: Luceco (LON: LUCE)
Just as important as buying into a company at the right time, however, is knowing when to jump ship – even if it means taking losses. Luceco is a supplier and manufacturer of high-quality LED lighting products. As with FeverTree, Patel bought into the company when it first went public in October 2016, purchasing at 130p a share.
Initially, the share price rose strongly, reaching a high of 267p in November 2017, he notes. However, following the announcement of a large profit warning in December 2017, shares tumbled by 40 per cent on the day. In response to the profit warning, the fund sold at an average price of 113p in December 2017. While this resulted in a loss for the fund, it was a necessary move under the fund’s strategy of selling on the first profit warning. ‘The rule of selling on first profit warning is a strong part of sell discipline for the fund,’ Patel says.
‘Profit warnings tend to come in threes for a reason: the first is posted when management finds an issue, the second when management have done a quick stock-take, and the third when the full scale of the issue is discovered.’ Patel was proven right.
Share prices have continued to fall, reaching 29p at one point. Shares subsequently recovered somewhat, reaching around 77p, until – as Patel anticipated – the company released its second profit warning in early March 2018, causing prices to tumble again.
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