As Black Friday draws to a close and we look towards Advent, the best value gift out there for those yet to do their festive shopping is still quality growth stocks, and in particular, UK stocks.

The divergence between momentum stocks and quality is at the widest it’s been since the dotcom bubble and we believe represents a once in a generation opportunity to pick up these high free cash flow, stable earnings growth businesses.  Traditionally these stocks are fully (if not over) valued, but today in comparison to their momentum peers (eg Mag 7) they’re almost as cheap as chips!

The UK is littered with these forgotten diamonds in the rough, but they are still quietly doing their thing. For example, Halma, the life-saving technology and devices manufacturing company. They announced H1 results in November as the company raised it’s full-year outlook after delivering record revenue and profit. The company continued to cherry pick companies, acquiring two over the period and benefitted from the outperformance of their 2011 purchase of Avo Photonics who lifted revenues by over 50% as hyperscalers continued to use their solutions for the construction and operation of AI super-datacentres. 

AI has certainly been the watchword for the last 24 months or so, with pick and shovels businesses such as Halma and data vendors such as LSEG, RELX and Experian, benefitting and harming stocks. With the latter three businesses, the AI trade has been against them, but we still believe in the long run that these businesses which own the data and the IP have valuable treasure troves which in time can be successfully monetised. On the other hand, not all management teams who pivot to the undoubtable benefits of AI enjoy instant success and rocket-like share price performance. Rightmove learnt this the hard way. We initiated in the business in late October after shares depreciated, however in early November, management unveiled plans to accelerate investment in AI capable technologies indicating that higher spending would slow profit growth in the near term. Shares tanked ~20% on the announcement as analysis calculated profits to be in the region of 3-5% rather than the forecasted 9%. Hopefully this is a case of taking our medicine now for a rosier and sunnier AI-led property platform future and not just a case of jam tomorrow. 

The market isn’t all AI-led… Games Workshop issued a short trading update proving there is still value and returns in companies that have strong IP and USPs, even if the main business is the manufacture of figurines in Nottingham. Shares jumped 12% as management guided for profits to be above consensus, this is even more impressive when 2024 was a year dominated by licensing revenue which will halve for this year. 
It has been a tough environment for quality growth in the UK, but we believe that for long-term returns it is the right style to remain invested in the highest quality companies with the strongest balance sheets and best brands, intellectual property and barriers to entry, which at the moment are as attractively priced as we’ve seen in over two decades.

Wishing you all a merry Christmas and happy new year.

The above article has been prepared for investment professionals. Any other readers should note this content does not constitute advice or a solicitation to buy, sell, or hold any investment. We strongly recommend speaking to an investment adviser before taking any action based on the information contained in this article.

Please also note that the value of investments and the income you get from them may fall as well as rise, and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance.