There are no prizes for guessing what was the most bought stock of 2024: Nvidia, the hot US chipmaker delving deep into AI. Retail investors with UK brokers Hargreaves Lansdown, AJ Bell and Interactive Investor ploughed more money into the tech giant than any other company last year.
But while US megacaps dominate the headlines, in the UK there are a bunch of quiet stalwarts on the stock market that, over the years, have weathered successive storms while persistently improving shareholder returns — and ought not to be overlooked.
Take Relx, the data, analytics and publishing group. The company, which is beginning to use AI to expand its services, has consistently outperformed the UK market. Its market value is about £70bn. The shares are up 18 per cent in a year and pretty much twice what they were five years ago.
Back when I worked on Lombard, the FT’s one-time British business column, we dubbed these companies the “Stealth Stakhanovites”, after the Soviet-era worker heroes who personified efficiency, technological innovation and productivity.
These corporate worker bees are frequently underrated, often operate in unglamorous industries and lift profits bit by bit rather than in sudden dashes. But they have a proven knack for efficient expansion into adjacent sectors and regions. Bunzl, distributor of anything from plastic spoons to paper towels, has made 200-plus acquisitions in two decades. Its market value is 10 times what it was 30 years ago. Halma, maker of life-saving technology and safety equipment, is almost as acquisitive. The shares are 20 times what they were three decades ago.
And still, while these companies have a reputation for earning above sector-average margins, generating cash and meeting and beating investors’ expectations, they often rank low in the stock market pantheon — heroes perhaps but not gods.
Small-cap markets have would-be worker bee heroes, too. Lack of scale means progress tends to be bumpier. But one group that exhibits many attributes of a Stealth Stakhanovite is Renold, whose shares are up nearly a third in a year, valuing the Manchester maker of industrial chains and gear boxes at nearly £110mn. Even 150 years ago the Institution of Mechanical Engineers said of Hans Renold, the group’s founder: “Few realise how extensive is the influence of Renold’s inventiveness on both civil and industrial life throughout the world.”
Today, Renold, whose name adorns one of Manchester University’s science buildings, is the second-largest industrial chain maker in the world with an 8 per cent share of the global market built by a mix of innovation, investment and acquisitions.
Renold’s couplings, levers and links are highly engineered, using specialist materials and tailored treatments to withstand extreme environments. We are not talking bike chains. Its components are found in Disney roller coasters, automated Amazon warehouses and used extensively by the Canadian Navy.
Akhil Patel, an analyst at broker Shore Capital, suggests Renold will come into its own amid “structural trends such as onshoring, re-industrialisation, automation and defence”. The shift to localise supply chains in the US, where Renold has three factories, will serve the group particularly well. But everywhere higher-specification chains are increasingly in demand to drive productivity, efficiency, accuracy, reliability and sustainability, says Shore.
Of course, like any hero, Renold has erred. It was forced to restate profits after miscalculating costs for three years to March 2019. Then Covid-19 hit and supply chains shut down around the world. By April 2020 the shares had plunged to about 6.5p.
However, investors seem happy now that costs are under control. Profitability is up and the shares are about 50p. In the half year to September, operating margins were north of 10 per cent and could be in the mid-teens within a year or two, says Shore.
Markets remain challenging, warns Robert Purcell, who has been the group’s chief executive since 2013. However, geographical spread gives Renold “built-in resilience,” he says. It is a mark of his optimism — and the group’s cash generation — that this year Renold is paying a dividend for the first time in nearly two decades. Dividends, he says, always trail capital investment and acquisitions.
Yet the group is underrated — even if you add in £50mn-plus of pension obligations. Enterprise value, including about £40mn in net debt, is less than four times forecast earnings before interest, tax, depreciation and amortisation. Add back pension liabilities and it rises to nearer 5 times. The sector average according to broker Zeus Capital is about 8 times and not growing as fast.
So how to identify the small-cap heroes of the future? Some companies languishing in the doldrums may have potential to join the ranks of the stalwarts — if they can make good on their strategy. One is Trifast, a £111mn maker of fancy nuts, bolts and screws for the past 52 years.
Trifast puts together technologically complex and highly engineered components that go into London taxis, water meters, data centres and CT scanners all over the world. “We are experts in how to fit things together,” says newish chief executive Iain Percival.
That said, Trifast operates in a fragmented and competitive market, is more cyclical and doesn’t command the same position as Renold. Classicists harp on about those fatal flaws of heroes that lead to their downfalls — pride, jealousy, etc. Lack of pricing power might just be Trifast’s weakness. The group struggled to hold its own when Asia slowed and the Ukraine war started in 2022. It reported pre-tax losses in the years to March 2023 and again in 2024 and trimmed its dividend.
The company lacked sufficiently robust controls and failed to manage its supply chain or cost inflation, says Percival. Inventory ballooned, as did debt, and profitability halved from pre-pandemic margins of 10-plus per cent.
Percival’s job now is to focus on cash generation and rebuild profitability both organically and through acquisition. Early signs are the strategy is working. Net debt is below ebitda, margins are inching up and could be up to 10 per cent by 2027, says Peel Hunt. Trifast is less profitable than Renold and more expensive on an EV/ebitda ratio of nearer six times. Nonetheless, Cavendish and Zeus reckon it’s priced well below the sector average.
Also on the back list of potential worker-bee heroes is Strix, the Isle of Man maker of kettle controls and water filtration systems whose name has more to do with Tawny Owls (Strix Aluco) than kettles or heroes.
Strix is acquisitive, commands a sizeable share of the kettle safety control market, earns fat ebit margins, has expanded its reach into other areas such as steam management and temperature controls, and has operations across the globe, including the US and China.
However, it has been hit hard by economic headwinds, not least in China and Russia — a big market for the group. Debt reached twice ebitda, which combined with profit warnings, has made investors nervous.
The group has restructured and streamlined the business, raising nearly £90mn in a placing and pausing the dividend to conserve cash. Debt is coming down. But a recent trading update in November highlighted continued weakness in sales, to analysts’ disappointment. Broker Stifel cut pre-tax profit expectations for this year and next by close to a quarter.
Strix will gain a place in the index of halfling heroes when it can convince the market that its struggles have been more to do with geopolitics rather than an inherent flaw in its nature.