Two nimble small caps

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Companies have seen rising labour and energy costs start to crimp their margins. Natalie Tam, Investment Director at Aberdeen Standard Investments told us that while these sort of challenges are uncontrollable, some companies are better placed to respond than others, and outlines two stock examples.

In this short video Natalie poses a few questions to consider when scouring for companies that can navigate emerging macro challenges: “Can these companies have nimble enough supply chains to work around a US-China trade war? Can they innovate enough to offset costs by focusing on simplification or automation? Or do they have a product that's so innovative that it has its own demand?” Get the full story including examples of two nimble small caps.

Edited transcript

“When we go out and speak to our companies, we are getting a lot of feedback that they are seeing cost inflation coming through from energy input costs, and that a bit of labour inflation is coming through. Then it's a case of looking for those companies that can adjust to these events.

So can these companies have nimble enough supply chains to work around a US China trade war and the tariffs that that involves?

Can they innovate enough to offset costs by focusing on simplification or automation?

Or do they have a product that's so innovative that it has its own demand, because no one else in the market can catch up to that product?

These are the kinds of companies that we're looking for in this market, ones that can survive and even thrive when times do get tougher.

When we look at small caps we see innovation in companies like Fisher & Paykel Healthcare, a market leader with 70% market share in respiratory acute care, and really it doesn't have any competitors that are even close to where they are in terms of their technology and their innovation.

In fact, their closest competitor, it's not a focus of that business. It's a larger conglomerate-type business that isn't heavily focused on the niche that Fisher & Paykel are playing in. So we think that the growth can continue there.

Other companies that we think can take advantage of some of the weaknesses that we see coming through 2019 would be something like ARB.

ARB is in the business of selling parts and accessories for 4 wheel-drive vehicles. So that's more of an opportunity for 2019. It has been sold down on the back of US-China trade war fears, but we think longer term they should do quite well because they've got strong automation coming through in their factories, and also the locations of their factories are quite good.

They do the majority of their manufacturing in Thailand alongside many of the car manufacturers themselves. So they get an early look at new models of cars and can develop products and accessories for them before their competitors even get a look in at those new models. So that's an example of a company that we think has a good sustainable competitive advantage and has gotten cheaper”.

Further insights

If you would like to read more analysis from the team at Aberdeen Standard, please visit their website


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