Columbia Threadneedle: Five quality growth stocks with potential in all weathers

After initial US jobless claims rose in the summer, equity markets globally had a tantrum. Closely watched, the July labour market data sparked fears that the Federal Reserve risked falling behind the curve in revitalising a slowing economy. Reported at the beginning of August, the numbers were viewed as an economic weather warning.

The price action that followed was amplified by short-term investment strategies closing positions on a massive scale, but it was further confirmation that economic growth is slowing. The odds of recession have gone up, although they are still slim.

This uncertainty could change the short-term pricing of risk assets but it doesn’t diminish the attractions of quality growth stocks. We look for quality businesses with durable competitive advantages that offer scope for generating attractive returns on capital. 

Uber

Uber has almost become a verb. “How are you getting back from the airport?” “I’m getting an Uber.” For many of us, calling an Uber is a habit. Uber dominates the rides business in the US market.

As scale matters in ride hailing, Uber is comfortably profitable and our analysis indicates that it’s set to generate over $5bn in free cash flow this year, while competitors continue to struggle with costs. The long-term growth prospects of the business look positive.

Union Pacific

As the second biggest railroad in the US, Union Pacific is distinctly ‘old economy’. So why would we be interested in it? The US is a very big country and sending freight over long distances by rail costs less than by truck. Union Pacific has a programme to reduce costs while improving the speed of its trains.

As the trains get faster, they deliver a better service. It’s a virtuous circle: they gain market share in transportation and grow profits. As no one will ever build another railroad network, Union Pacific only adds as many new miles of track a year as it did in two days back in the 1880s. The free cash flow generated by the business is supportive of dividends and buy-backs. 

BT Group

The UK’s dominant telecom business seems an unlikely investment for our portfolio as it’s regulated and hardly high growth. Yet it’s also defensive at a time when inflation has eroded the pricing power of many consumer-facing businesses.

Think of McDonald’s and the success of its $5 meal. What’s more, BT Group has now finished the capital expenditure programme for connecting fibre to UK homes that started in 2016. Capital expenditure will fall for the rest of the decade which means that cash could be returned to shareholders.

Cooper Companies

We have held this US vision and women’s health business for a long time. Recently it has been investing in manufacturing and initiatives like a product for myopia.

We believe Cooper’s manufacturing investment gives it a cost advantage. Quarterly results from the firm appear to show a return to delivering operating leverage, and this could prove positive for profit margins from here. We anticipate earnings growth compounding at over 10% in the coming years.

Shopify

Are you a small or medium sized retailer that wants an online e-commerce channel? If so, Shopify is your answer: it can design your website, handle logistics, take payments and help you expand your business. It has a full line of product offerings, for small customers through to large enterprises.

Shopify’s 50% gross profit margin is now starting to scale, and in recent quarters it has achieved double digit operating margins and has generated free cash flow. Looking forward, we believe that there’s scope for this business to increasingly benefit from economies of scale.

In our view, these are the sort of businesses that offer long-term potential and can operate well in a range of economic conditions and weather short-term fluctuations in markets. Indeed, in our experience, it’s often in tougher periods that businesses such as these with strong competitive advantages gain market share at a faster pace than ever.

The mention of any specific shares should not be taken as a recommendation to deal.

Past performance does not predict future returns. All intellectual property rights in the brands and logos set out in this article are reserved by respective owners.

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^{For professional investors and qualified investors only. This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority. In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act and relies on Class Order 03/1102 in marketing and providing financial services to Australian wholesale clients as defined in Section 761G of the Corporations Act 2001. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws. In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore. In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058. In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association. In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority. In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841. In Switzerland: Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland. In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA).  For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. 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