Alex Wright's contrarian investments have taken the Fidelity UK Smaller Companies fund to third place in its sector by returning 29.5% over the past year. In September, Wright took over Fidelity’s Special Values investment trust. Here are the latest stocks he has bought and sold, and the one he’s holding on to.
BUY: CRESTON A Creston shareholding was one of the first purchases Alex Wright made for the Special Values investment trust. The company is a small media agency that operates across public relations, communications and insight.
Wright first bought shares in the summer of 2012 but added to his holding following a profit warning, judging the company as undervalued compared with its peers. He says: "I like the media sector as a whole; there is a lot of change. The internet is taking budget away from traditional advertising, and public relations is a big beneficiary of that." Because the shares were bought in stages, Wright has paid between 75p and 82p a share. They are currently trading at 81p.
Wright says companies would have had a large advertising budget 10 years ago and "PR would only be getting about 5% of [the combined] budget", but public relations is now seen as the more effective tool. He says this change has come about as companies are now "shooting at a much larger marketplace".
Wright favours Creston because the company’s valuation has not yet been re-rated to reflect its current price to earnings ratio of just six and its attractive dividend yield of 4.5%.
Wright is a long-time lover of small-cap companies. He says smaller agencies such as Creston have merger and acquisition potential. In Creston’s case, a bigger agency has recently taken a 6% stake in the company. While this is interesting in the short term, Wright will always tend to close out a position once it becomes too large or he sees its potential as having been achieved.
HOLD: N BROWN Catalogue retailer N Brown might not be an obvious choice for investment - even Wright concedes that catalogue shopping is a dying industry. However, he has held shares for nearly 18 months now, previously in the Fidelity UK Smaller Companies fund and now in the Special Values fund.
Wright says the retailer is adapting its business model well to new technology by moving into the online space. Its sales were up by 50% over the past year and a rise in online sales has improved the company’s finances - because online sales cost the firm less than catalogue sales. Previously, it has spent £90 million on producing catalogues while posting profits of not much more at £110 million.
Moving online is broadening its range of sales channels, while its catalogue business remains quite niche. Internet shopping is easily accessible and allows the business to grow internationally.
Wright bought the share at around 275p, and it has already risen to 360p. He believes it has further upside potential. "Catalogue sales are definitely falling but internet sales are growing at a faster rate to replace them," says Wright.
SELL: KINGFISHER Wright inherited some holdings in the Special Values trust that he is not overly keen on. One holding he has already axed is Kingfisher, which owns B&Q in the UK and Castorama in France.
Wright was concerned by the company’s increasingly high operating margins, particularly in France. He says DIY companies such as these tend to rely on a buoyant property and home improvements market, which is not currently in evidence, especially in France.
He says: "I am looking for businesses with potential for positive change but I think it has played out for Kingfisher for now." He adds that he can’t see much room for upward movement in margins and that "there is nothing exciting there".