Fundsmith portfolio manager Terry Smith has made a lot of money for his investors with a very simple strategy. He’s simply invested in high-quality, resilient businesses that are very profitable and held on to them for the long term.
If you’re a fan of Fundsmith, and the way Smith invests, I think you may be interested in the two UK shares below. Both of these stocks are held in the Smithson Investment Trust – the smaller companies-focused investment trust run by the Fundsmith team that follows a similar strategy to the open-ended global equity fund. Like all Fundsmith stocks, these UK shares have many high-quality attributes.
FTSE 100 growth stock
The first is Rightmove (LSE: RMV). The chances are you know the company as it operates the largest property website in the UK.
It’s not hard to see why the Fundsmith team likes Rightmove. Firstly, the company has a massive competitive advantage – its brand. Believe it or not, more people in the UK start their home search with ‘Rightmove’ than ‘property’.
Secondly, RMV is very profitable. Last year, return on capital employed – a key measure of profitability – was 384%. That’s extremely high. It tells us that for every £1 of capital employed by the company, it generated a profit of £3.84. Own a stock generating that kind of return on capital over the long run and the chances are you’ll do pretty well from it.
Rightmove has experienced challenges this year due to the Covid-19 lockdown. But it now appears to have its mojo back. As a result of the recent stamp duty announcements, interest in UK property is soaring and buyers are flocking to rightmove.co.uk. The stock is still more than 10% below its 2020 high however. I’d snap it up today despite its lofty forward-looking P/E ratio of 31 (using next year’s EPS forecast).
A resilient Fundsmith-like stock
Another UK stock that has Fundsmith-like attributes is Domino’s Pizza (LSE: DOM). It’s also held in the Smithson portfolio.
Like Rightmove, Domino’s is a high-quality business. For a start, its brand power provides a competitive advantage. When you think of takeaway pizza, Domino’s is the name that comes to mind.
Secondly, its franchise model is very profitable. Over the last three years, return on capital employed has averaged 32.5%. That’s excellent.
Third, the company is very resilient. This is illustrated by the company’s recent half-year results. For the 26 weeks ending 28 June, UK and Ireland sales were up 5.5%. Underlying basic earnings per share fell just 1.1%. Those results are impressive when you consider the UK economy is facing its worst decline in around 100 years.
Domino’s shares currently trade on a forward-looking P/E ratio of about 21, falling to under 20 when you plug in next year’s earnings forecast. I think that’s a very reasonable valuation for this business. If you’re a fan of the Fundsmith investment style, I think this UK share could be worth a closer look.
