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Most investors are in a permanent state of restlessness, always on the lookout for the next big investment with the potential to turbocharge their portfolio’s returns.
Even if their current holdings represent the most efficient use of capital, many savers would rather repeatedly sell up to buy the shiny new stock that piques their interest that day.
However, in Questor’s view, sticking with high-quality holdings for the long run, as opposed to continually buying and selling stocks, is the most effective way to generate big returns from shares. It allows companies to deliver on their full potential, which can take years in some cases.
Therefore, despite a share price rise of 9pc since our initial recommendation in December last year, and an outperformance of the FTSE 100 index by 11 percentage points, we think the consumer healthcare business Haleon is worth sticking with.
The company, which sells well known brands such as Sensodyne, Panadol and Voltaren and was once part of the drugs giant GSK, recently released a third-quarter trading statement that showed it was performing relatively well in tough operating conditions.
Sales rose by 8.5pc on an organic basis in the first nine months of the year. Although growth moderated to 5pc in the third quarter, this was partly due to lower volumes in North America caused by one-off inventory adjustments by retailers.
Encouragingly, the company’s operating profit margin increased by almost a full percentage point to 24.6pc during the third quarter. It has been able to pass higher costs on to consumers, while its productivity programme continues to gather pace.
In fact, Haleon expects to deliver £300m in annualised cost savings over the next three years, mostly in 2024 and 2025.
It should also benefit from the end of the current cost-of-living crisis as inflation is soon expected to fall to target levels in the major developed economies and central banks are widely expected to adopt a looser monetary policy.
This could lead to improved trading conditions for the business as the pressures on household budgets, which have encouraged consumers to cut back on spending or seek cheaper substitutes, abate.
Haleon’s trading update also reconfirmed its full-year financial guidance. It had previously raised forecasts for the 2023 financial year to growth of 7pc-8pc in organic revenues and of 9pc-11pc in adjusted operating profits.
Future growth is likely to be helped by the company’s exposure to fast-growing emerging markets such as China and India.
They accounted for around a third of sales last year and, as emerging economies are expected to grow by 4pc this year and next against a figure of around 1.5pc for developed economies, Haleon is well placed to capitalise on growing demand for healthcare products.
Innovation is another key catalyst for the company’s bottom line, and for its share price, over the long run. In its first-half results it announced the release of several new sub-brands, as well as the entry of existing brands into new territories.
It also increased or maintained market share in existing markets across 55pc of its business and continues to have significant potential to expand into e-commerce, since only 9pc of its revenue are generated via online sales.
Separately, the company reduced net debt by £343m to £9.5bn in the first half of the year. This results in borrowings of around 58pc of assets, while net interest costs were covered more than six times by profits in the first half of the year, which shows that the company has solid financial foundations on which to invest for future growth.
After their rise since our initial recommendation, Haleon’s shares now trade at a rather heady 17.6 times forecast earnings. At a time when a host of FTSE 100 constituents have bargain basement valuations, some investors may consider selling a relatively expensive stock to buy a cheaper one.
However, Haleon continues to offer significant capital growth potential.
Its diverse and enviable stable of brands has allowed it to raise prices during the current period of heightened inflation and it benefits from a sound growth strategy, a solid financial position and the prospect of better operating conditions as the global economy’s performance gathers pace.
It therefore remains a worthwhile holding that even the most restless of investors should resist the temptation to sell. Hold.
Questor says: hold
Ticker: HLN
Share price at close: 323p
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