UK stocks are never the most popular with investors. But that’s especially true in a market obsessed with unprofitable startups.
There are, however, plenty of proven companies that have fallen out of favour recently. And that’s especially true at the smaller end of the market.
Filtration
One example is Porvair (LSE:PRV). It’s a specialist filtration company that’s pretty much completely insulated from algorithmic disruption.
It designs filters for aerospace, nuclear energy, and life sciences. And these industries have some important features for investors.
In aerospace, Porvair’s filters are impossible to replace. This means the company can increase prices to offset inflation.
In lab settings, the company’s products are designed to be used once. The result is significant repeat business for the firm.
Maybe ChatGPT will write all the future software code. But it won’t be able to filter impurities out of air going into an engine.
A quality business
Porvair’s strong competitive position drives consistently strong returns on invested capital. Covid-19 aside, it’s been well above 10% over the last decade.
Source: Fiscal.ai
This is due to the fact the firm doesn’t have to fight off tech obsolescence every 18 months. Instead, it can figure out ways to invest its cash and grow.
Despite this, the stock trades at a price-to-earnings (P/E) multiple below 20. To me, that looks like a bargain relative to some more well-known competitors.
The most obvious reason for this is that it trades on a part of the stock market investors don’t often focus on. It’s listed on the UK’s Alternative Investment Market.
That, however, has nothing to do with the quality of the underlying business. As a result, I think it’s an opportunity that’s worth a closer look.
What are the risks?
Even for a business as well-protected as Porvair, there are always risks. The biggest is probably the volatility of the end markets it sells into.
Aerospace is a good example. It’s a notoriously cyclical industry, where demand for aircraft can wax and wane dramatically in different economic environments.
There’s no way around that for Porvair. But one advantage the firm has is that its products are relatively inexpensive.
That means demand from existing aircraft is usually relatively strong. It’s uneconomical for a firm to ground part of its fleet because it needs a new filter.
That doesn’t eliminate the ups and downs, but it does help make them more manageable. And that’s a key advantage for Porvair.
Under-the-radar opportunities
I think Porvair is well worth considering at today’s prices. And it’s an example of something much more general.
UK stocks – especially at the smaller end of the market – aren’t always well-known. But that doesn’t mean they’re not great businesses.
Strong operating metrics and durable competitive positions don’t always come with huge price tags. The key is to look where others aren’t.
Investors searching for hype and excitement should set their sights elsewhere. But for those focused on tangible returns, I think there are real opportunities to consider.
Should you invest £5,000 in Porvair Plc right now?
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Stephen Wright has no position in any of the companies mentioned.
