Buy British gems in rough markets

Jonathan Jones names four stocks that are shining through in parts of the economy investors normally avoid

ASTRAZENECA 164 Number of drugs the firm has in its pipeline

WH SMITH ‘WH Smith has a cuckoo in the nest that is becoming a dominant influence’

TESCO

GALLIFORD TRY £1.1bn Value of the business after planned deal with Bovis

Investing in high street retailers, housebuilders, supermarkets or pharmaceutical stocks has largely led to disappointment. But regardless of how bad a sector may seen, there are always diamonds in the rough for those willing to dig.

Investors can make big gains by buying into a business when its industry is perceived as struggling, as good companies can be indiscriminately shunned by investors.

Stock-pickers have identified for Telegraph Money four top shares that have been ignored yet offer potentially market-beating returns.

TESCO

Traditional supermarkets have come under pressure from the German discounters Aldi and Lidl and their profits are far below their peak. The weaker pound has also increased the cost of imported food.

Alasdair McKinnon of the Scottish Investment Trust said Tesco was one national supermarket that could “rise above the gloom”.

Despite a fall from grace after er an accounting scandal it remains ns Britain’s largest chain by market share. Amid that controversy, it was already struggling as higher prices and poor customer service put shoppers off. It had invested in overseas operations and made little return.

A new boss, Dave Lewis, set about tackling these issues and made new plans. The company bought cash and carry firm Booker to diversify and launched a new chain of discount stores, Jack’s.

Mr McKinnon said: “Food retailing remains a tough industry, but investors like long-term plans like this that are successfully delivered.”

ASTRAZENECA

The share price has risen by 20 percentage points more than the market so far this year

Healthcare stocks offer a mixed bag. Drugs firms can spend millions on new products but with little certainty about whether they will win regulatory approval. The sector’s hit-or-miss character can act as a dampener on share prices, leaving a potential opportunity for investors.

AstraZeneca had struggled in recent years: it earned stable turnover from existing drugs but had a limited number of new ones coming through.

Richard Hallett of Marlborough Fund Managers said new management had reinvigorated the company,

Number of Jack’s stores – Tesco’s discount brand – in Britain investing heavily in research and development. This reduces the reliance on a single big win, boosting profits and returns to investors.

It now owns the rights to a number of leading cancer drugs and has a good crop of new treatments going through clinical trials, Mr Hallett said.

WH SMITH

The decline on the high street has been well documented, as bricksand-mortar retailers struggle against consumers’ shift online. However, Julian Fosh of Liontrust Asset Management said WH Smith was the lone bright spot. Although he described its high street branches as “unremarkable”, the travel arm, which now accounts for more than 60pc of sales, is going from strength to strength. “It is the cuckoo in the nest – it has been quietly growing into a dominant influence,” Mr Fosh said. The stores, which can be found at railway stations, airports, hospitals and motorway service areas, benefit from a lack of meaningful competition and captive customers.

GALLIFORD TRY

Housebuilders have been great investments, but the outlook has darkened and their shares look expensive. Low profit margins on newbuilds mean many may struggle to make decent returns.

But Hugh Sergeant of River & Mercantile, the fund group, said Galliford Try was in a “unique position” as both a housebuilder and general construction firm.

A tie-up with Bovis Home also means investors could own a national housebuilder and a construction business with the latter effectively valued at nothing, he said.

More than 1.7 million households may be unable to take out affordable flood insurance because they fall outside a state-backed protection scheme.

Yorkshire and Lincolnshire have been hit by severe flooding since last weekend. Some areas are under 10ft of water.

Flood premiums and excesses have been kept down since April 2016, when insurance firms and the Government set up Flood Re, an “insurer of insurers” that reduces the risk that one firm might face a crippling claims bill.

But homes built since 2009 are barred from the scheme, regardless of their risk of being swamped, as insurers did not want to encourage building in flood-prone areas.

The cut-off means that the owners of a house built in 2008 would qualify for lower-cost insurance even if it flooded, while a neighbouring property built in 2009 or after would not.

There are now 1.4 million homes excluded in England, 173,076 in Scotland, 68,997 in Northern Ireland and 62,457 in Wales, according to official figures.

The 1.7 million total also does not include leasehold developments with four or more flats, which are not covered by Flood Re regardless of when they were built.

A spokesman for the Association of British Insurers (ABI), a trade body, said: “It’s not that people in these areas won’t be able to get flood cover, but the provisions of Flood Re would not apply.”

In theory, homes built since 2009 should be at less risk of inundation as tougher rules came in for local authorities considering development in flood-prone areas.

But in practice, building in these regions continued. In the 2015-16 tax year, 9pc of new homes were constructed in areas at the highest risk of flooding.

A spokesman for the National Flood Forum, a charity, said: “Consideration of flooding should be at the top of the agenda. But properties that are being built now are still flooding.”

A claim for a waterlogged home can be up to £45,000, according to the ABI.