The market for UK stocks remains choppy. And it’s been hard for many investors to make much overall progress lately with their portfolios.
However, suppressed market conditions can be the friend of the investor who’s focused on long-term returns. And that’s because an unenthusiastic market can lead to depressed valuations.
In one example, super-investor Warren Buffett has earned a reputation for shopping for stocks in markets like these. And that’s because he aims to buy quality businesses with decent growth prospects when their valuations are modest.
Investing in R&D
I may not have his resources, but right now, I like the look of molten metal flow engineering and technology company Vesuvius (LSE: VSVS).
The business develops and makes high-technology products and solutions mainly for the steel and foundry casting industries. And as part of that, it has a sizeable Research and Development (R&D) operation.
With the share price near 413p, the market capitalisation sits around £1.12bn. And the valuation looks undemanding.
City analysts expect a modest rebound in earning of around 16% in 2024. But that’s after a drop of nearly 48% this year. Indeed, one of the risks with this enterprise is its apparent cyclicality. Indeed, the multi-year record of earnings is volatile.
Nevertheless, set against analysts’ expectations, the forward-looking earnings multiple for next year is just above eight. And the anticipated dividend yield is a little under 6%.
I see that shareholder payment as attractive. And it’s been notching up each year since 2020. However, the dividend will likely be cut or trimmed in any future general economic downturn.
Resilient trading
In May, the company reported “resilient” trading in the first four months of 2023. And the directors said the improvement was down to better volume and pricing performance.
There’s been some recovery in the company’s end markets after a poor fourth quarter in 2022. But the directors warned that the pace of recovery is “slow and uncertain”. And those observations underline how sensitive Vesuvius is to the general health of the economy and its industrial markets.
Nevertheless, looking ahead, the company said its growth capital investment programme is proceeding as planned. And that will likely support the performance of the business when the market recovery “accelerates”.
I’m optimistic about the prospects for the UK and world economies. And because of that I see the Vesuvius business as having stored-up potential to grow in the coming years.
Chief executive Patrick Andre said that despite short-term uncertainty, the directors are “highly confident” in the company’s growth potential. And the “industry leading” investment in R&D and the growth capital investment programme will continue “at pace”.
My view is that R&D can be a big driver of returns for shareholders in any business over time. However, positive outcomes aren’t guaranteed with any stock.
Nevertheless, Vesuvius is currently at the top of my list for further investigation and research. And if I had £5,000 to invest, I’d consider buying it now.
