Neil Woodford is one of the most reputable fund mangers in the UK equity income space. His big bets on tobacco stocks in the nineties and his decision to stay out of the technology sector before the dot-com bubble has earned his investors — and himself — huge returns.
Most of us in the investing world know that he still holds big positions in tobacco and healthcare stocks today, but relatively few of us know that small- and mid-cap stocks make up an increasingly larger share of his portfolio. You may be surprised to find out that relatively obscure names, such as Allied Minds (LSE: ALM), Newriver Reit (LSE: NRR) and BCA Marketplace (LSE: BCA), are some of the Woodford Equity Income Fund’s largest positions.
Allied Minds
Woodford is a big fan of Allied Minds, a company which commercialises technology research from universities. The technology incubator is currently the 12th largest holding in the Woodford Equity Income Fund, with his investment company directly controlling a 28% stake in the company.
Investing in early stage innovation is a risky business, but it can be very rewarding if and when investments start to pay off. Many of the companies which Allied invests in have minimal cash flow and unproven track records.
That said, the company’s diversified portfolio of investments and the due diligence conducted by management helps to de-risk promising, early-stage innovations. Moreover, Allied Minds’ good relationships with the best research institutions in the US gives it a unique strategic position within its industry.
Newriver Reit
NewRiver is a small-cap UK property company specialising in the retail and warehousing sector. The REIT has an above average dividend yield of 6.4%, which allows it to easily beat the sector average of 3.8%. As such, it has appeal for income-starved investors at a time when interest rates are so low. It also helps to explain why NewRiver trades at a premium of 15% to its net asset value (NAV) of 290p.
Looking forward, City analysts expect the REIT’s prospective dividend yield to rise to 6.6% by the end of 2017 and 6.7% by 2018.
BCA Marketplace
Another interesting Woodford holding is BCA Marketplace. The automotive business is the 19th largest holding in Woodford’s fund, with the stock representing 1.39% of its portfolio as at 31 January 2017.
Through its acquisition-led growth strategy, BCA Marketplace owns and operates We Buy Any Car, the UK’s largest vehicle buying service, and the company is also Europe’s largest used-vehicle marketplace. Formerly known as Haversham Holdings, BCA has strong growth prospects as it expands its footprint and leverage its scale in the automotive marketplace to deliver economies of scale.
Looking forward, City analysts have pencilled in underlying EPS growth of 56% this year, with a further expansion of 20% in 2017/8 and 13% in 2018/9. Such rapid earnings growth would likely be accompanied by similarly robust dividend growth too. City analysts expect dividends to rise 36% this year, which gives its shares a prospective yield of 3.6%.
Trading on a P/E ratio of 20.7 times expected earnings, and with a dividend yield of 2.6%, BCA Marketplace looks reasonably priced given the high growth expectations of the company.