Which British stocks offer the best quality and growth?

Investing in the UK has often felt thankless over the past eight years. Our domestic stock markets have underperformed since 2016 as global investors have found more enticing alternatives. Our approach in the Rathbone UK Opportunities Fund has been to assess what sorts of characteristics are common to the names these global investors have been seeking, and to see if we can replicate them here. We often discover that similar businesses trade on a postcode-driven discount.

We aim to buy quality businesses that are growing well at reasonable prices. By “quality”, we mean companies that consistently make profits well above expenses with little borrowing. Another factor we search for is higher-than-average profit growth.

These characteristics tend to be highly sought after, so the trade-off is that our fund’s stocks generally trade at prices that are higher as a multiple of profits than the market as a whole. Our portfolio averages a price-earnings (p/e) multiple of around 18 versus 12 for the FTSE All-Share index. Cheap valuations never persuade us to buy a poor-quality business.

Many of the companies that meet our criteria are mid-caps (48% of our fund is invested in FTSE 250 names, compared with 14% in the FTSE All-Share). We believe this is the sweet spot for firms: they are still small enough to be innovative and able to grow rapidly, but just large enough to have matured and be capable of generating the chunky returns we seek. A few examples below illustrate how we put our theory into practice.

Top British stocks

The recent initial public offering (IPO) of Raspberry Pi (LSE: RPI) went well, which is a very positive signal for UK equities . Founded to supply simple computer modules to encourage children to play with computers, not just on them, the company now provides these to industrial clients across the world. Raspberry Pi ticks our boxes, having delivered 38% compound annual revenue growth since 2012. No wonder the stock has gained 45% since listing in June.

We think this is an excellent example of a high-quality, growing company with low debt and experienced management that should appeal to global investors. The group has yet to issue its first set of numbers. These can prove a tense time for new flotations, so we are cautious ahead of that event.

Cashing in on cards

We recently bought Moonpig (LSE: MOON) , the online greeting cards company. While well known for personalised greeting cards, we think there is unappreciated value in its “experiences” business (which offers services such as spa days).

The experiences market is both huge and fragmented, and we believe Moonpig is capable of tapping into it. In addition, there are more than half a million Moonpig Plus subscribers paying an annual fee to earn discounts on each card they buy. This makes it easier to forecast future revenues and profitability.

Customers tend to be loyal once they start using the platform: I know I appreciate the timely reminders about birthdays! But sending cards is not an industry in rapid growth, and sending pricey gift experiences is highly cyclical, so investors should heed the group’s forecasts and valuation.

Bloomsbury Publishing (LSE: BMY) has been a top performer in our fund thanks to strong earnings growth. Best known as the publisher of J.K. Rowling’s Harry Potter books, Bloomsbury has used its cash flow to reinvest in new authors, an academic division and, lately, to buy rivals.

Alongside all this investment, Bloomsbury still managed to increase its dividend by an average of 10% a year over the last decade. And it still has cash left over for a rainy day. The flip side of having big-hitting authors is that years when they don’t release a new book can mean earnings wane, the situation that obtains at present.

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