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Questor: Get to this top British share while investors are still overlooking it

Scientist using microscope in laboratory
Scientist using microscope in laboratory

The FTSE 250 index is often overlooked by investors.

Those seeking an attractive income or relatively low-risk shares usually buy FTSE 100-listed firms due to their historically high yields and size advantage over smaller companies.

Other investors seeking capital growth tend to either purchase small-cap UK stocks with upbeat growth prospects or invest internationally in relatively buoyant economies such as the US.

However, in Questor’s view, UK mid-cap shares currently offer a hugely attractive long-term investment outlook.

The FTSE 250 index contains a wide range of high-quality companies that have solid balance sheets and sustainable competitive advantages.

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In many cases, they operate across a variety of geographies, have the potential to generate fast-growing profits, and trade on fair valuations.

Over time, simply buying and holding such companies can generate high returns for investors on both an absolute and relative basis.

For example, Oxford Instruments has generated a 20pc capital gain since first being tipped by this column in December 2022.

The FTSE 250 member, which designs and manufactures equipment used to analyse matter at an atomic and molecular level, has outperformed the mid-cap index by 15 percentage points and beaten the FTSE 100 index by 12 percentage points since our original recommendation.

Its latest annual results were relatively encouraging.

Revenue rose by 9.8pc, while operating profits were up 3.7pc year-on-year.

While profits were in line with market expectations, the firm saw a 100 basis point decline in its operating profit margin compared with the previous year.

It fell to 17.1pc as a result of the business ceasing certain commercial activities in China and making ongoing investment in its operations.

Still, the company’s return on equity amounted to 18pc.

This is relatively high but is made even more impressive by the fact that the firm uses a very modest amount of debt in its capital structure.

Indeed, its net cash position currently stands at around £50m.

This provides it with scope to bolster its financial performance via acquisitions, with the company’s latest purchase of Femto Tools announced alongside the release of its annual results.

Separately, a reorganisation of its operations is set to act as a further catalyst on Oxford Instruments’ financial performance.

It is aiming to generate annualised revenue growth of 5pc to 8pc, excluding the impact of acquisitions, over the medium term.

It is also seeking to grow its operating profit margin by at least 290 basis points so that it stands at 20pc plus over the coming years.

The company’s financial performance is, of course, likely to be aided by an improving global economic outlook.

Although it is listed in London, the firm generated less than 7pc of its sales domestically in the latest financial year.

Its exposure to faster-growing economies such as China and the US, with the latter’s performance set to be boosted by upcoming interest rate cuts, means the firm’s financial prospects are increasingly upbeat.

Of course, some investors may feel that Oxford Instruments’ growth potential is already factored into its share price. The stock has surged higher over recent weeks, with it rising by around 6pc in the past month alone.

It now trades on a price-to-earnings ratio of 24.1, which is substantially higher than the market valuations of many other UK-listed companies.

In Questor’s view, the stock is worthy of its premium valuation.

Its financial performance has been held back to at least some extent by an uncertain outlook for the world economy that this column fully expects to abate over the medium term.

Moreover, the firm’s excellent financial position and clear competitive advantage mean it remains a high-quality company poised to capitalise on growth opportunities across a broad range of markets and geographies.

Therefore, the company remains a worthwhile long-term purchase.

Certainly, there is now reduced scope for capital growth than at the time of our original recommendation. And the FTSE 250 index may continue to be overlooked by many investors in the short run.

But with stock market participants having historically warmed to companies that are capable of delivering sustained profit growth, Oxford Instruments is set to generate further capital gains over the coming years.

Questor says: buy

Ticker: OXIG

Share price at close: £26.30


Read the latest Questor column on telegraph.co.uk every Sunday, Monday, Tuesday, Wednesday and Thursday from 8pm

Read Questor’s rules of investment before you follow our tips