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Investment expert Nick Train thinks there’s a huge opportunity in UK growth shares right now. And he’s putting his money where his mouth is.
The manager of the Finsbury Growth & Income Trust has sold out of international stocks and is focusing on the UK. But there’s more to the story than this.
Selection
Not all UK stocks are the same. And Train’s portfolio isn’t a broad-based bet on FTSE 100 and FTSE 250 companies – it’s actually quite heavily concentrated in a few key names.
According to the most recent update, almost half the fund is made up of Experian (LSE:EXPN), RELX, London Stock Exchange Group, and Sage Group. And they have one thing in common.
When it comes to tech, these companies represent the biggest and best the UK stock market has to offer. And Train thinks they’re being overlooked at the moment.
The FTSE 100 isn’t the first place most investors go when it comes to growth stocks. But Train thinks that’s an advantage – it leads to more attractive valuations for strong businesses.
Valuations
I’m not convinced. For example, Experian’s a similar business to Equifax and TransUnion – both listed in the US – but the UK stock doesn’t trade at an obvious discount.
On a price-to-earnings (P/E) basis, Experian looks much cheaper. It trades at a multiple of 37, which is lower than Equifax (50) or TransUnioni (66). But there’s a catch.
Both Equifax and TransUnion report adjusted profits to try and remove distorting effects on earnings per share. On this basis, they trade at P/E multiples of 33 and 24 respectively.
Adjusted metrics are always a bit tricky, but all three trade at similar price-to-sales (P/S) ratios. On this basis, Experian (6.1) isn’t cheaper than Equifax (5.4) or TransUnion (4.5).
UK discount?
Experian’s a quality company. Its database is incredibly difficult to replicate and it has an attractive position in emerging markets that could generate strong growth over time.
There are, of course, risks. A combination of high interest rates and weak construction output might weigh on demand for mortgages and this could challenge the company’s growth.
The point though, is the stock isn’t really trading at a significant discount to its US rivals. And while Experian isn’t Train’s only example, I think there’s better value elsewhere.
When it comes to undervalued UK stocks, I think the most obvious examples are outside the FTSE 100 – and even the FTSE 250. There are a few exceptions, but this is where I’m looking.
Bargain hunting
Train thinks UK growth stocks are a “generational opportunity” and he’s prepared to back up this statement with his cash. I agree, although I have different companies in mind.
Looking where other investors aren’t paying attention is a strategy that appeals to me quite a lot. But I’m not convinced the FTSE 100 is as overlooked as Train thinks.
As the companies get smaller, the number of analysts following decreases. This is where I think the really outstanding opportunities for investors to consider right now are.
