Investors should buy this bargain while everyone else worries about interest rates

science lab
science lab

Long-term investors sometimes forget the huge advantage they have over their less patient counterparts. While short-termist investors obsess about how high interest rates will rise in the coming months and fret about whether inflation has peaked, patient investors can simply buy high-quality stocks and wait for them to come good.

This may take weeks, months or even years, depending on how an infinite number of “known unknowns”, including interest rates and inflation, pan out. Indeed, in Questor’s view there is no point guessing when the next bull market will start or speculating how deep the current stock market decline will be.

Investors are far better off spending their time unearthing high-quality companies that, over the long run, are very likely to deliver strong capital growth.

One such company is the FTSE 250’s Oxford Instruments, which designs and manufactures equipment used to analyse matter at an atomic level. For example, its products provide insights into the production process of batteries, a market likely to grow rapidly as the world aims to achieve net zero. Its products also help businesses to develop advanced materials that use fewer resources and offer greater efficiency.

Crucially, the company has a strong competitive advantage that is extremely desirable in the current period of economic uncertainty: its recent half-year results showed that it was able to fully offset higher costs through price rises. In fact, its adjusted operating profit margin increased by 0.4 of a percentage point to 18.4pc.

Last year’s return on equity figure of 19pc further evidences the company’s excellent market position. Importantly, it was achieved in spite of the business’s very low levels of debt. At the time of its half-year results, total debt including lease liabilities amounted to just 17pc of net assets and it had a net cash position of roughly £66m.

A solid balance sheet means the company is ready to make acquisitions while asset prices are at relatively attractive levels. It bought WITec, a provider of imaging solutions, last year for €42m and could realistically deploy significantly greater sums to strengthen and broaden its product offering. Indeed, its half-year report stated that it was reviewing a pipeline of acquisition opportunities.

A net cash position also allows the business to rapidly increase spending on research and development. It rose by 18pc in the first half of the year and is likely to further improve the company’s competitive position. A solid balance sheet is also highly advantageous given the continued rise in interest rates and uncertain short-term economic outlook.

A slowing global economy, though, has not been evident in Oxford Instruments’ recent financial performance. Despite supply chain disruption, revenue in the first half of the year grew by 10.2pc and the business is on track to meet full-year guidance.

Its order book increased by 29pc and its strategy of focusing on structural growth markets linked to long-term sustainability themes is clearly paying off. This could make it less cyclical than other FTSE 350 companies that are highly dependent on the economy’s growth prospects.

Despite a 16pc fall since the start of the year, the company’s shares continue to trade at a rich valuation of around 23 times adjusted earnings. While this is far higher than the ratings of most FTSE 350 shares, Oxford Instruments expects its trading performance to improve in the second half of the year. Since adjusted pre-tax profits rose by 23.5pc in the six months to Sept 30, the company’s shares do not look overvalued.

Clearly, the stock’s short-term prospects are impossible to predict, thanks to the wide range of those “known unknowns” that could have a positive or negative effect on investor sentiment.

But for long-term investors who can look beyond an uncertain near-term outlook for the global economy and stock market, Oxford Instruments offers attractive capital return potential thanks to its sustainable competitive advantage and solid financial position.

Questor says: buy

Ticker: OXIG

Share price at close: £22

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