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David Kempton: five stocks I'm buying in my Brexit hibernation

David Kempton: five stocks I'm buying in my Brexit hibernation

I have given up attempting to interpret the daily twists and turns of Brexit. I’m in hibernation mode. Wake me up when it’s over!

I can't affect the result, nor judge the outcome any more than Theresa May or Michel Barnier, so am unable to adjust my investment decisions to suit a completely unknown situation.

If the result is half good, UK markets and the pound should surge with a flood of houses coming onto the spring market. If it’s bad I will stay here and stick it out and not join the queue to buy a house in Galway, Porto or Mauritius. I will remain and work with whatever hand our politicians have dealt us.

Successful investment is never easy but in the exceptional times the UK investor is now experiencing it is even more difficult.

This has created either a once-in-a-decade buying opportunity for UK domestic stocks or a precursor for worse to come and time to run for the hills. I’m trying to do both by adopting an approach which would seem to me to fit the current circumstances. 

I have bought some FTSE 100 international companies, some carefully selected smaller stocks, mostly in the service and technology sectors unaffected by potential port or shipping delays, and a core holding in funds whose managers have an exceptional track record. I watch the portfolio 24/7 and maintain 30% in cash, with half of that in dollars.

We are so consumed by Brexit issues on every news bulletin that it is easy to forget the larger world outside, losing sight of the trade war between the US and China trade war that could potentially make Brexit a side show.

We have the leader of the world’s most powerful economy running it like a small company, unilaterally, without regard to his advisers. A loner, quite unable to bring his team on side on the major issues, while the world’s press await the late night tweets to try and work out what’s going to happen next.

Meanwhile the Chinese economy declines, in spite of government efforts to stimulate, Asian and emerging markets are all seemingly ex-growth and mature old Europe appears to be in reverse. Only fortress US ploughs on and even there any thought of increasing interest rates to get back to ‘normal’ is abandoned, whilst a national emergency to build the border wall is universally unsettling.

I have sought refuge in buying some big international UK heavy hitters with big dollar earnings, high yields and potential growth even in current scenarios. I debated on buying AstraZeneca or GlaxoSmithKline.

I bought GlaxoSmithKline (GSK) for a yield of more than 5%, the highest of the large cap European pharmaceutical companies, 96% worldwide exposure and now with a recently invigorated pipeline of new drugs, the issue which has long held back the shares. The proposed splitting of consumer healthcare should enhance value, adding to their safe haven attraction. 

I’ve added to my long-term holding in Shell (RDSb) by the 6% yield and the more than 3% of market cap that is set to be returned through share repurchases each year.

It’s a massive fully integrated oil and gas company encompassing not just exploration and production but also chemicals, refining, retail and renewable energy systems.

I’m attracted by the reported 34% jump in earnings with huge cash generation and streamlining of all divisions with the disposal of non-core assets.

You have to remain comfortable with the oil price holding close to current levels, but as an old Saudi hand I follow the politics carefully, convinced that the strange alliance between the Russians and the Saudis, both providing about 10 million barrels per day – over 20% of world consumption – can swing production to hold the price. The US, also now on 10 million barrels, needs the current price to maintain the economics of its expensive fracked resources.   

I have laboured the point here of cutting investment losses at 20%, moving that factor up with a rising share price and, although I made five times my money on Burford Capital (BURF) in about two years, a recent 20% dip in the share price took me out.

I have regretted selling ever since, but have recently bought a similar company, Manolete Partners (MANO). This floated on the Alternative Investment Market last December at 175p, operating as a new smaller, cheaper Burford. 

Each year in the UK there are about 14,000 corporate insolvencies and 40,000 bankruptcies handled by 1,700 insolvency practitioners, attempting to extract the maximum benefit for creditors, often involving litigation against officers, debtors and advisers.

Burford and Manolete both offer specialised finance to the legal market. Burford, on a much larger international scale, has seen its share price rise by 18 times in 10 years.

The smaller, newer Manolete is very selective, offering 1,300 cases for a claim value of nearly £4 billion since 2009.  It purports to offer quicker settlement, showing an impressive 200% average investment return on litigation financing. But as Manolete and Burford’s respective numbers show, it has a long way to catch up:

  Manolete Burford Capital
Market cap £115 million £3.6 billion
Revenue £13 million £128 million
Profit £6 million £97 million
Price-earnings ratio 14 24

I have added to my long-term holding in Kromek (KMK) after the recent 25p placing. The $58 million (£45 million) seven-year medical imaging contract is transformational for a company with revenue of £12 million and a market cap of £72 million, now with an apparent £100 million order book.

A developer of radiation detectors, Kromek provides improved imaging for the medical, nuclear and security markets, split equally between the UK and US. The company moved to a Pittsburgh facility last year to produce the cadmium crystals in commercial quantities for its CZT-technology, meeting market demands as one of only four companies capable of such supply. 

It is sad to reflect that even as the US announces the termination of the IS caliphate, MI6 is warning of the potential terrorist threat to our cities. Kromek will likely see increased demand for its dirty bomb detector, offering 10 times faster detection at a tenth of the cost.

As the sole supplier, Kromek is delivering 10,000 units to the US Department of Defense. There are no historic profits or price-earnings numbers but the new orders and potential convinces me that there soon will be and I’m getting in at an early stage.

I’m writing this in South Africa where I’ve had two days at the world’s largest mining investment conference, the African Mining Indaba. No individual stock really rocked me.

But I have doubled my stake in one company operating in the sector, Anglo Pacific (APF).

Anglo Pacific’s small, highly-skilled London team assesses mining opportunities and lends money to operators from which they draw royalties on the production.

While currently attractive with a 5% yield, price-earnings ratio of eight times and cash of £8 million, the recently announced 40% increased coal production for 2019 at Australia’s Kestrel mine, into a market hungry for its high-quality coal, is very significant. It should lead to a significant increase in royalty income and to further diversification over time.  Analysts expect the yield to coming through to increase to over 7% in 2021.

My core holding is in the cautious Vanbrugh and Distribution funds run by Hawksmoor Investment Management, which I leave to the managers, having total faith in their judgment and 24/7 commitment, well demonstrated by recent performance and awards. But then, as a director of the company, I would. 

David Kempton is a non-executive director of Hawksmoor Investment Management and a non-executive director of Impax Funds Ireland. He is an experienced investor, proprietor of Kempton Holdings and a non-executive director of a number of quoted and private companies. He may have an interest in any of the investments which he writes about.

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