Expert Stock Picks: Magic Mid-Caps

Published in Investing on 25 April 2012

We spotlight some of the best mid-cap ideas from top professional stockpickers.

This month, we make our third visit to the FTSE 250, looking for superior mid-cap prospects favoured by our 'Expert Eight' stockpickers.

Our pro pickers generally take a medium- to long-term view on their investments, but, as we did with the blue chips last month, let's have a quick look at the early performance of the mid-sized companies we've highlighted so far.

CompanyHighlighted share priceGain/(loss) (%)FTSE 250 gain/(loss) (%)
Oxford Instruments (LSE: OXIG)763p63.69.8
Fidessa (LSE: FDSA)1,685p(9.1)9.8
Devro (LSE: DVO)260p18.15.0
Average 24.28.2

The blue chips had put in an impressive early shift for us, but the mid caps have done even better, despite a lacklustre performance so far from Fidessa, a provider of software solutions to the financial industry.

Popular picks

There has been little change since last quarter in the table of firms that figure in the top 10 holdings of more than one of our managers.

CompanyNo. of managers holdingPortfolio weighting
Oxford Instruments27.3%, 5.1%
Devro25.9%, 3.5%
Dignity (LSE: DTY)24.8%, 3.1%

Oxford Instruments was in the top 10 holdings of three managers last time, so it would appear that one has taken some profits on this big riser.

Domino Printing Sciences (LSE: DNO), a longstanding top 10 holding of one manager, entered the table last quarter when share price strength saw it edge into the top 10 of a second manager who holds. It has since edged back out again.

Among the buys of our stockpickers since last time, SDL (LSE: SDL), a company that's more interesting than its nondescript name suggests, caught my eye. SDL, which helps businesses manage their brands and engage with their customers, describes itself as "the world leader in Global Information Management".

SDL has long been a top 10 holding of one of our Expert Eight, but a second manager has now taken a position in the firm. Unfortunately for us, the shares have since risen strongly -- as have those of some other companies our managers have been buying.

Missed opportunities

We only look at each market -- blue chips, mid caps and smaller companies -- quarterly in this series. Unfortunately, that means some exciting opportunities that crop up during the quarter can become a lot less attractively valued by the time I come to tell you about them! You may recall that last time I lamented the missed opportunity of being able to write about specialist engineer Renishaw (LSE: RSW) as a bargain for your delectation.

The shares of the mid-cap company I'm going to highlight today are currently trading a bit above the price at which one of our stockpickers would be an "enthusiastic buyer".

In choosing to alert you now, I can hopefully avoid missed-opportunity syndrome.

The other nice thing is that our stockpicker's investment thesis includes a wonderfully clear exposition of the philosophy -- much encouraged here at the Fool -- of buying great companies at the right price and holding them for the long term.

AG Barr (target price 1,100p)

AG Barr (LSE: BAG), the maker of Irn Bru and owner of a strong stable of other soft drinks brands, is a holding for two of our Expert Eight managers: Nick Train (Lindsell Train UK Equity and Finsbury Growth & Income (LSE: FGT)) and Charles Montanaro (Montanaro UK Focus and Montanaro UK Smaller Companies (LSE: MTU)).

Barr has been a substantial holding for Train for donkey's years. Montanaro is also a long-term holder, but the firm has rather less weight in his portfolio than in Train's.

Barr is trading today at around the same share price as two years ago. Train tells us:

"It seemed plausible enough to us back then that the shares might tread water … Why not sell, find another stock, then trade back into Barr after its couple of years in the doldrums?"

He gives three reasons:

  • "We were confident of Barr's dividend growth … we covet the long run dividend stream it provides."
  • "We knew that the strong cash generation would … permit the acquisition of new brands, or … the build of new production capacity for existing brands in a new geography. This cash generation is a competitive advantage for Barr but because opportunities arrive haphazardly, it is impossible to know exactly when the competitive advantage will boost the share price."
  • "We are always reluctant to sell out of exceptional businesses, except on the most excessive of valuations."

In hindsight it might appear simple to sell a stock like Barr that's going nowhere for a while and to buy back in later, but Train warns:

"In real-time this is not such an easy thing to deduce or execute. Our conviction about the calibre of Barr's business and about the likelihood that its pricing power will protect long term shareholders against the ravages of inflation is much stronger than our conviction that the shares may or may not take a pause for breath."

Wise words indeed, in my view, and applicable for investors not just in Barr but in any high-calibre business.

So, at what price would our pro stockpicker be an enthusiastic buyer of more shares in the company? Answer: "Another 50p lower." Based on the price at which the shares were trading at the time, I put the target at around 1,100p.

Looking for the next magic mid-cap? Try our Motley Fool Share Advisor newsletter free for 30 days. Senior Market Analyst David Kuo and team will give you their two top share ideas on the fourth Monday of each month.

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

QuantumDealer 25 Apr 2012 , 5:14pm

I like Devro and SDL even at these levels...I am a little concerned with Renishaw given the massive price rise in recent months.

jasonjarvisgbr 27 Apr 2012 , 2:39pm

So branded sugar water is very profitable. Who knew ?

M0byDick 08 May 2012 , 2:35pm

Addendum. I've just noticed that AG Barr's shares have fallen to the 1,100p target today (8 May); indeed they seem to have spiked down as low as 1,033p at one point in the middle of the day! Foolish best, MobyDick (G A Chester - article author)

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