Ten stock market bargains: Top investment managers and stockbrokers pick their favourites

After more than four years of relatively uninterrupted growth, Britain's equity markets have begun to falter over the past few months, with the FTSE 100 index of the UK's largest companies hovering around the 6,500 mark. But in spite of several years of strong returns, many fund managers still believe the UK market is undervalued, claiming the recent slowdown merely presents a strong buying opportunity. We asked 10 of the UK's top investment managers and stockbrokers to each pick their favourite summer bargains
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The Independent Online

George Finlay, one of the managers of the Marlborough Special Situations fund: Hamworthy

"Hamworthy appeals because it ticks all the boxes we like. It is a niche business providing safety critical products to fast growing global businesses, the shipbuilding industry and the LNG (liquified natural gas) industry. LNG is increasingly a vital part of the world's fuel mix and Hamworthy is the global leader in this market . On land, it has developed a technology that traps gases released during the development of oil and gas fields.Hamworthy is also the world leader in the provision of desalination systems for cruise vessels. A stock to sit on."

Chou Chong, manager of the Dunedin Income Growth Investment Trust: Premier Foods

"Premier Foods is the UK's biggest food company and owns brands such as Branston and Crosse & Blackwell. It has recently added Batchelors to its portfolio, and early in 2007 acquired RHM, whose brands include Hovis and Bisto. We are confident Premier will be able to extract considerable production and cost synergies from the RHM acquisition, and refresh newly acquired brands such as RHM's Bisto and Mr Kipling. Shares are trading at about 12 times estimated 2008 earnings, and the stock also offers investors a dividend yield of 5.2 per cent."

Trevor Green, manager of the Allianz RCM UK Mid Cap fund: Cape

"Cape is an international supplier of essential support services for the energy sector. It provides services such as scaffolding, insulation, fire protection and specialist cleaning for blue-chip customers including BP, Exxon, BNFL and Scottish Power in the UK. At its recent AGM the company was in a position to increase materially its earnings forecasts for the full year, which is significant with their year end still five months away. This shows the strong visibility it has on its order book, and it looks likely that next year it will return to paying a dividend."

Felix Wintle, manager of the Neptune US Opportunities Fund: Crocs Inc

"Crocs is the maker of a shoe phenomenon. The shoes, sold in more than 40 countries, are hard-wearing and comfortable. We discovered this stock as a result of our investment process, taking a top-down macro view before researching the company. Our contention for more than two years, that the market's view on the US economy and its consumers was too bearish, led Neptune to look at consumer stocks. Crocs is in the growth phase of a global roll-out and earnings will double this year. Our unrealised gain so far is 83 per cent."

Henk Potts, equity strategist, Barclays Stockbrokers: British American Tobacco

"One could be forgiven for thinking that the increase in smoking bans and the constant bombardment of anti-smoking adverts would spell bad news for the big tobacco companies. However, British American Tobacco (BAT) recently reported first-quarter results which were better than market expectations, with the group recording double-digit earnings growth. This strong performance was driven by emerging markets in Asia, Latin America and Africa, where cigarette sales continue to rise. BAT is very cash-generative and plans to increase its dividends by 15 per cent a year over the next two years. BAT also plans to spend £750m buying back shares this year. The stock currently trades at 1,620p – we believe its fair value is 1,780p."

Richard Marwood, manager of the AXA distribution fund: BT

"The equity market is under pressure over a number of concerns at the moment; a weak dollar, sub-prime debt, weaker consumer spending and rising bond yields. But a stock relatively undisturbed by any of these threats is BT. Most of BT's business is done in the UK and denominated in Pounds; demand for its services are stable, pretty much regardless of economic conditions; and higher bonds yields might actually help the company, due to a higher discount rate being applied to the liabilities of the pension fund. The stock has a dividend yield of over 4 per cent and investors buying before 22 August are still entitled to receive the 10p final dividend. Although the dividend has grown strongly in recent years, there is still scope for more growth ahead."

Makis Kaketsis, manager of the F&C UK Dynamic fund: Domino's Pizza

"One of my long-standing positions and one which I continue to feel is undervalued is Domino's Pizza. The company holds the exclusive master franchise to own, operate and franchise Domino's Pizza stores in the UK and Ireland. It owns the commissaries which supply the raw materials down to the franchises. The company currently has 450 stores and aims to expand this to 1,000 stores by opening 50 stores a year. Although the market thinks Domino's is expensive – it is currently trading at a premium to the market - it overlooks the fact that the business has no debt and does not require large capital expenditure. For every £1 the company makes in profit, the majority can be returned directly to shareholders. It has a strong national brand, and there are plenty of growth opportunities. In the US, 75 per cent of the population has had a pizza delivery from Domino's, versus only 23 per cent in the UK."

Tom Dobell, manager of the M&G Recovery Fund: HSBC

HSBC saw its shares hit this year when it announced some unexpected loan losses relating to the US's sub-prime mortgage market. But having met the management, Dobell is reassured about the company's prospects and believes the market is overly concerned. "HSBC has several unrivalled market positions – particularly in Asia – giving it fantastic geographic diversity as well as strong cash-generation," he says. "The US is just one of its markets."

Nils Taube, manager of the S&W Taube Global Fund: Royal Dutch Shell B

"Royal Dutch Shell B offers me safety and stability. It is not the cheapest investment available but, relative to any other equity, it is very solid and has the ability to survive market turbulence. Priced at 10 times earnings and with a gearing ratio of 6 per cent of debt to total assets, the company has ample funds available for investment. Natural resources have been a favourite in recent years and it is reasonable to assume that the price of energy will not fall without an early recovery. Oil prices are supported to a greater extent by private demand. Demand for cars in China has more than trebled in the last few years and whilst Chinese GDP continues to grow at 11 per cent, the US's per capita car ownership hugely exceeds China's. If you want to sleep peacefully, this is probably the most reliable investment in the field at its current price."

Chris Watt, manager of the Jupiter Environmental Income Fund: Hydro International

"This is a stock we have held for a long time, but it is very topical given the recent weather conditions in the UK. It specialises in controlling and treating storm and waste water using proprietary vortex-based technology. It is a good example of the kind of business that interests us: small, at an early stage in its development, but has developed real traction using unique technology in a growing market. We therefore believe it has the capacity to become a significant market leader."

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