THE U.K.’S ECONOMY IS GROWing again, albeit slowly, and domestic stock prices already have risen to reflect this. However, fund portfolio managers still are finding British stocks worth investing in, which means there could be some real winners for your clients.

Economic growth in the U.K. is expected to be 1.3% this year, says Martin Fahey, head of European equities with I.G. International Management Ltd. in Dublin and manager of Investors European Equity Fund, while the eurozone is expected to see a drop of 0.4%.

The U.K.’s relatively better – and quicker – economic recovery is the result of several factors, including: early action on banks hit hard by the global credit crisis; continued strong foreign investment in London’s residential real estate; the abandonment of the initial government austerity package; programs to stimulate the domestic U.K. housing market; more aggressive monetary easing than in Europe; and the relatively weak pound sterling currency.

The various regions of the U.K. also are expanding fairly evenly – unlike in the eurozone, where the south still is deep in recession, but the north is growing. This dichotomy makes it difficult to find the right policy stance for the eurozone, says Peter Hadden, portfolio manager in Smithfield, R.I., with Pyramis Global Advisors, a unit of FMR LLC (a.k.a. Fidelity Investments) and co-manager of Fidelity Europe Fund.

As well, he explains, the independent pound sterling currency has operated as a pressure valve for the U.K.’s economy, allowing for depreciation, which has pushed up the profits of exporters.

Don Reed, president and CEO of Franklin Templeton Investment Corp. in Toronto, is particularly impressed with the U.K.’s improved banking sector, pointing to the government’s recent sale of part of its stake in Lloyd’s Banking Group PLC, which the government had taken on five years ago to rescue the tottering giant.

In fact, says Charles Burbeck, co-head of global equity portfolios with UBS Global Asset Management (U.K.) Ltd. in London, bank stock prices already have risen to the point at which they’re currently too expensive to recommend for short-term gains.

Some other sectors also have had a good run. For example, Fahey says, it’s harder to find value among retail, travel and leisure and telecommunications stocks.

Nevertheless, all of these portfolio managers note several stocks that they believe offer good investment opportunities. Here’s a closer look at some:

– ASSOCIATED BRITISH FOODS (ABF) PLC. Despite ABF’s name, about a third of the firm’s revenue comes from discount clothing sales from its Primark retail division. Primark sales haves been growing very fast, says Fahey – at twice the pace of competitor H&M Hennes & Mauritz AB’s sales – and the division is expanding in Europe, particularly in France and Germany.

A report from analysts with J.P. Morgan Cazenove (JPMC) in London points to 22% sales growth and the 9.5% increase in selling space in the third quarter, ended June 22, for the Primark stores. The report also notes that management reports new store openings will accelerate in fiscal 2014. The report recommends “overweighting” ABF stock, with a price target of 2,000 pence (p), about $33.25, a share; the stock closed at 1,906p ($31.75) on Oct. 10.

– BG GROUP PLC. This multinational is an oil driller, but also has a “great” natural gas distribution business and a “very lucrative” liquefied natural gas (LNG) trading business, says Hadden, who likes BG’s offshore operations in Brazil, in which the firm is an investor in projects managed by Brazil’s government-owned Petróleo Brasileiro SA (a.k.a. Petrobas).

Hadden explains that the LNG trading business takes advantage of the arbitrage opportunities that arise because the price of LNG can differ widely around the globe.

BG’s stock price is reasonable, given its prospects. A JPMC report has an “overweight” rating on it, with a price target of 1,550p ($25.80) a share; the stock closed at 1,178p ($19.60) on Oct. 10.

– COMPASS GROUP PLC is the largest global food-services firm. It provides food directly, and through franchises, to large entities such as governments, hospitals, universities and penitentiaries. The company also owns Restaurant Associates, which runs higher-end restaurants in the U.S. Reed says Compass benefits from economies of scale: the firm’s size allows the purchase of supplies at “rock-bottom” prices and, thus, Compass can be very competitive in its bids for contracts.

A JPMC report says that Compass has increased its margins in Europe and further improvement is anticipated. As well, the outlook for North American operations “remains solid.”

Reed thinks Compass’s stock is “a little pricey” but adds that it would be a good investment if the price weakens. A JPMC report has an “overweight” rating on the stock, with a price target of 950p ($15.80) a share; it closed at 849.5p ($14.15) on Oct. 10.

– KINGFISHER PLC. Both Burbeck and Reed recommend this home-reno supply firm. Kingfisher is the biggest player in the U.K., with about a 25% of the market, and operates in France and Poland.

With the U.K. government’s stimulus programs, Burbeck expects the home-improvement market to grow by 10% a year over the next few years.

Reed likes Kingfisher’s management, noting that it quickly reduced the firm’s activity in China when stores didn’t do well there; he considers the stock to be attractively priced right now.

The stock closed at 370.5p ($6.20) a share on Oct. 10, down from 420p ($6.97) on Sept. 10.

– PERSIMMON PLC builds about 10,000 homes a year, mainly for the “middle market,” which Reed says is “the sweet spot” in the U.K.’s housing market right now. Persimmon also owns attractive tracts of land on which it can build. The stock price moved up “smartly” last year, says Reed, but he thinks it’s still “reasonably priced.”

But a JPMC report gives the stock a “neutral” rating with a price target of 1,275p ($21.20) a share; it closed at 1,195p ($19.90) on Oct. 10.

– VODAFONE PLC. This telecom company is selling its stake in Verizon Wireless to Verizon Communications Inc. for US$130 billion and will return US$84 billion to shareholders. Reed feels this move is “very responsible.” He also expects the firm to do “something good” with the $41 billion that will be left after it pays the US$5 billion in taxes on the deal. He adds that the stock is attractively priced. It closed at 217.4p ($3.60) a share on Oct. 10.

– WHITBREAD PLC is the largest player in the U.K.’s “three star” hotel market. The rooms are affordable and the firm has a formula that works, says Fahey. Whitbread also operates the Costa Coffee chain, which, he says, is the fastest growing coffee franchise in the U.K. and also has a large presence globally.

A JPMC report lists the firm as a “long-term winner but fully valued in the short term,” rating the stock as “neutral,” with a price target of 3,250p ($54.10) a share; it closed at 3,114p ($51.85) on Oct. 10.

– WILLIAM HILL PLC (WH) is another of Fahey’s recommendations. Bookmaking increasingly is going online, and WH is executing this strategy well. There will be a new 15% tax on online betting as of Jan. 1, 2015, notes Fahey, which could shake out some of the weaker players to the benefit of WH.

A JPMC report also favours the stock, giving it an “overweight” rating with a price target of 550p ($9.15) a share; the shares closed at 405.8p ($6.75) on Oct. 10.

© 2013 Investment Executive. All rights reserved.