There are many “old” economy names among the select group of UK companies which have appreciated in value by 30 times or more. We put it to you that “boring” industries have the potential to produce some very exciting investments.
We are constantly encouraged to take note of the UK economy’s weak manufacturing sector, lack of investment and an absence of innovation. Nevertheless, for those willing to look beyond the headlines, we find a surprising array of world-class industrial companies on the UK stock market which have produced matching world-class returns for their investors.
Such companies feature prominently among the UK’s “30-baggers”, by which we mean UK quoted companies which have returned at least 2,900% - or 30 times over 30 years (see table at the foot of the article).
They range from Rotork and Spirax-Sarco Engineering – makers of specialist pumps for a variety of industries – to Renishaw, whose metrology devices ensure strict tolerances for safety critical and precision industries. These devices can measure a 27-metre aircraft wing to 0.3 millimetres, which is equivalent to the width of a human hair over the length of a swimming pool.
As investors in UK mid-sized companies, this makes us very optimistic for the future.
Boring “old” economy industries - exciting investments
Given a low base from which to achieve growth it’s no surprise investing in smaller companies can potentially be very rewarding. Being too small, however, can mean not getting noticed. This is why many UK companies start to come onto the radar of international investors only when they enter the upper echelons of the mid-sized bracket. Many UK ’30-baggers’ delivered most of their gains as mid-sized businesses, including Spirax-Sarco and health and safety specialist Halma.
Like Renishaw, Halma successfully straddles the industrial/technology spheres with high tech safety critical devices which serve major global industrial end markets.
While both Spirax and Halma are now constituents of the FTSE 100, in the late 1990s they were nestled in relative obscurity at the bottom of the FTSE 250. The FTSE 250 is the next most established group of shares trading on the London Stock Exchange’s main market and the official home of UK mid-sized companies since its inception in October 1992.
We find a plethora of 30-baggers in, so-called, boring, “old” economy industries. They include housebuilders, flooring companies, industrial machinery manufacturers, miners, distributors, defence businesses and wealth managers. More than a third of the 30-baggers fall into the broader industrials sector, where we see regional clusters such as in the south west where inventive founders at Renishaw and Rotork were able to draw on Bristol’s aerospace heritage, for example.
Some will suggest that investors have fewer technology companies to choose from on the UK stock market. It should be clear to the reader by now, though, that there are numerous companies, including industrials like Renishaw, which have clear technology aspects. We also see a high count of technology enablers and, crucially, adopters among the 30-baggers.
Additionally, investment trusts are a unique feature of the UK market (not found in the US) and we would point to a number of 30-bagger technology focussed investment trusts. However, the key takeaway from our data is that to earn exceptional returns over a very long period, it is vital to own businesses that are less susceptible to disruption.
The importance of discipline in deploying capital
That’s not to say we believe companies can’t use selective acquisitions to smooth the path towards reinventing themselves, when circumstances demand. We refer to this as “embracing disruption”. One-third of UK 30-baggers were serial acquirers. These businesses tended to acquire smaller companies rather than “bet-the-company” M&A.
Companies that repeatedly acquire small businesses gain expertise in selecting, negotiating and integrating deals. They often face less competition on smaller acquisitions with fewer private equity and international trade buyers bidding – all this might help explain, in part, why 30-baggers have been so sparing when issuing shares. Looking back a decade, the average company on the UK stock market has 21% more shares outstanding today. In comparison, the class of 30-baggers was practically unchanged at +0.2%.
Issuance of shares is the equivalent of selling small portions of the shareholders’ company. When shares are issued, regardless of whether this is for management compensation or for acquisitions, investors should ask if they are receiving as much in value as they are giving away. Careful use of their paper currency has spared minority investors like us from the risk of dilution. And it will have contributed to revenue-per-share growing at an 8% compound annual growth rate (CAGR) for the 30-baggers in the last 20 years, compared with only 0.5% CAGR for the UK market overall.
Enticing investment potential right now
Disciplined use of capital in combination with good scope to find growth niches among mid-sized UK companies (we estimate there to be 87 different sub themes in the FTSE 250) has translated into world-class returns for investors (see table, below).
We’ve found 59 UK quoted companies – including investment companies – to have achieved 30-bagger status. That’s equivalent to a 5.4% share of the UK stock market versus 4.2% in the US. In other words, our work suggests that the UK punches above its weight, in terms of multi-baggers, relative to the US.
What makes us especially excited about investing in UK mid-sized companies for the mid term, right now, however, is the statistically rare period of FTSE 250 underperformance versus the FTSE 100 in the past year. Such periods have, on average in the past, been precursors to ones of strong future outperformance (see here).