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Encouraging news from the week

Bioventix (LON:BVXP), the developer of high-affinity monoclonal antibodies for applications in clinical diagnostics, announced excellent interim results for the six months ending 31 December 2019. Revenue rose 21% to £5.3m and pre-tax profit was up 31% to £4.3m. The operating cash inflow was £4m boosting period end cash to £5.5m.

Bioventix isn’t facing quite as many challenges as others companies during the coronavirus lockdown. Healthcare products and services are priority products, with diagnostics among the most crucial. Management therefore expects its customers will continue to operate and Bioventix will continue to supply antibodies to them.

It’s also one of the few companies in the current climate able to commit to their dividend, with a 20% increase in the proposed interim to 36p.

Fundamental AIM for Inheritance Tax planning portfolios hold shares in Bioventix

While operating in totally different sectors, Bioventix joins Sage Group (LON:SGE) and Microsoft (US: MSFT), both Fundamental portfolio companies, as one of the more resilient companies on the stock market in the face of the current crisis.

Manufacturer of commercial floor coverings, James Halstead (LON:JHD), announced record 1st half results and, as a preferred supplier to the health service, its products continue to be in high demand.

For the 6 months ending 31 December 2019 sales rose 3.7% to £130.4m, pre-tax profit was up 2.8% to £25.2m and basic earnings per share increased 4.1% to 9.5p. The operating cash inflow of £28.4m boosted period end cash to £64.3m, just what’s needed going into the current crisis.

The group contemplated long and hard about the payment of its dividend. Approximately half their UK workforce and around 60% of former employees (who are now pensioners) are shareholders and rely on the dividend for income. Accordingly, they have decided to declare a first interim dividend of 2.125p per share, representing half of the interim dividend they would otherwise have declared. They will subsequently review the payment of a second interim dividend in August when visibility of the global economy may be clearer.

Who would have thought that flooring would have demonstrated such defensive properties. James Halstead is a long-term holding of Fundamental AIM portfolios.

Argentex Group (LON:AGFX), the provider of foreign exchange services to institutions, corporates and high net worth private individuals has kept a relatively low profile since listing in June 2019 but it continues to deliver on the significant promise. Fundamental AIM portfolios have started acquiring a satellite position in Argentex.

The latest trading update covering the 12 months to 31 March 2020 highlighted a strong performance, with revenue up over 30% to c.£29m and management confident of meeting full year profit expectations.

Somewhat surprisingly, there was no mention of material impact from the current crisis, other than continued strong performance. Non-Executive Director Henry Beckwith was an enthusiastic buyer of shares earlier in March and holds a 6.5% stake.

It appears to be almost business as usual for surgical and advanced woundcare specialist Advanced Medical Solutions Group (LON: AMS).

With £65m of cash in the bank and no debt at 31 December 2019, AMS is in robust financial condition. Furthermore, in the unlikely event that it’s needed, there is also an undrawn unsecured £80m credit facility.  AMS is committing to a final dividend for 2019 of 1.05p per share, which will cost approx. £2.25m.

AMS is another long-term core holding of Fundamental AIM portfolios.

Moneysupermarket.com (LON:MONY) reported 2% overall growth in revenue for the first quarter ending 31 March 2020 with insurance related revenue leading the way, growing 8%, while other areas saw reduced activity.

Diversified revenue streams, strong cash conversion and net cash of £30m at 31 March means the group is able to commit to the final dividend of 8.6p per share, which will cost £46m and equates to a yield of 2.93% at the current share price of 293p.

While other, previously admired, online groups like Rightmove (LON:RMV) and Auto Trader (LON:AUTO) have been found wanting in the current exceptional environment, MONY continues to deliver, although that hasn’t stopped the shares falling 30% from the July 2019 highs.

Pets at Home Group (LON: PETS), the UK’s leading pet care business issued an encouraging update for its financial year ending 26 March 2020, with full-year underlying pre-tax profit now anticipated to be slightly ahead of expectations following exceptional levels of demand, both in-store and online, in the last few weeks of the financial year as customers stocked up.

While the group carries substantial debt (net debt was £539m at 30 Oct 2019), unlike many retail businesses, its designation by the UK Government as an “essential retailer” means business continues and cash continues to flow.

PETS is also generously helping communities with £1.1m of funding to nominated pet charities, a £1m crisis fund for colleagues and discounts to NHS workers.

While revenue will clearly be impacted over the coming months, PETS is in a better position than many retailers and, as a result, the shares have held up better than most.

CMC Markets (LON:CMCX),the online derivative and stockbroking trading platform, issued a very positive update for the year ending 31 March 2020.

If, as is likely, stock markets remain volatile CMC will continue to reap the rewards, that’s assuming its clients don’t suffer too many losses!

The supportive environment and CMC’s strong balance sheet means that it will be able to commit to a dividend equivalent to 50% of profits after tax. Consensus forecasts for the March 2020 year were for a dividend payment of 14.43p per share, equivalent to a yield of 7% at the current share price, however, this might now be on the low side given the very strong final quarter.

While stock markets have tumbled, CMC shares have proven to be an excellent contrarian investment, rising 35% over the past 3 months.

To keep up to date with the coronavirus impact on these and many other companies please visit our associates Investor’s Champion


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Bear Market or Bull Market?

Despite falling on the last day of the week, stock markets (notably the US) still registered decent gains, boosted by the huge $2Trillion package of support signed off by the House of Representatives.

A manic rally during the week saw the US market climb more than 20% in 3 days, the best 3 day run since the 1930s, to enter what the Wall Street Journal termed a new bull market. We think it’s a bit early for such optimism, although with so much cheap money sloshing around the world there are suggestions the recovery could be quicker than many are currently expecting.

A new term took centre stage this week in the lexicon of company announcements with ‘Covid-19’ updates dominating the corporate headlines. Our associates Investors Champion issued daily commentary on many of these updates, which you can read from the link here.

Fundamental clients have free access to the Premium Content of the Investor’s Champion site so please let us know if you register so we can upgrade your account to premium.

Thankfully, the vast majority of our portfolio companies, have the reassurance of a net cash position and look well placed to see out the current crisis without the requirement for further equity injections. Unlike the financial crisis of 2008/09, banks are also in far better shape and happy to extend credit if required.

Companies are also set to be given considerable financial support from governments so that they can pay their staff, which should help prevent a major social collapse as well as an economic one.

Top marks this week go to consumer goods giant Unilever, which has committed to a huge package of support, and Redrow founder Steve Morgan, who has pledged £1m a week from his foundation to charities helping some of the most vulnerable sectors of society cope with coronavirus.

Companies across all sectors have been forced to cut their dividends in response to the current crisis and balance sheet strength is being tested to the extreme. Even those businesses with apparent cash reserves are drawing down on credit lines in advance of the barren period ahead.

It’s clear that, having gorged on cheap money for far too long, many businesses have little in store for rainy days, let alone the sort of biblical flood now being experienced.

Many companies take great delight in referring to their strong balance sheets, but these are often dominated by high levels of debt. Bill Gates, co-founder of Microsoft (a Fundamental portfolio company) remarked that, in the earlier years of the company he always wanted to have enough money in the bank so that even if their customers didn’t pay them for a year, Microsoft could still keep paying everyone and also continue to carry out necessary research and development. Microsoft had the luxury of gross cash of $134bn and net cash of $55bn at 31 December 2019 – the latter double its annual operating expenses, suggesting Gates’ philosophy remains to this day. If only others had adopted a similarly prudent stance.

We expect plenty of volatility over the coming weeks and months, but there could also be some excellent opportunities to buy inherently good companies at rock bottom prices.


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Why are Markets so Volatile?

An excellent article today in the Wall Street Journal ‘Why Are Markets So Volatile? It’s Not Just the Coronavirus’ commented how the stock market is now dominated by computer-driven investors that rely on signals such as volatility and momentum

Since the mid-February market peak, the Dow Industrials have closed more than 1,000 points lower on six trading days and rebounded at least 1,000 points four times, not seen since 1929. Adding to those moves, and potentially hastening them, are technical factors that have little to do with how investors feel about the outlook for companies, earnings and the economy.

In a dramatic shift since the financial crisis, the market today is dominated by computer-driven investors whose machines react to a series of technical and other factors, as well as by more-traditional investors who rely on reams of fast-flowing data. On many days, forces such as the market’s volatility and momentum, derivatives activity and the market’s liquidity—how easy or difficult it is to get in and out of trades—can help drive trading.

As long -term investors, we invest in companies based on their fundamental attractions and have little interest in apparent short-term trading opportunities, which only serve to enrich the brokers.

The clue is in our name!


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Our current thinking on the ‘Corona Crash’

This week’s stock market sell-off has been indiscriminate and, with a few rare exceptions, has materially affected the share prices of all companies, large and small.

The Financial Times has highlighted how the S&P500 index, dominated by some fantastic cash rich companies, experienced its quickest fall into a bear market on record, taking just 16 sessions. While the coronavirus, oil price and recessionary fears were the catalyst for the sell-off, the speed and severity of the fall was primarily due to the proliferation of automated computer trading systems which now dominate the trading of large company shares around the world.

In this regard it is noticeable that, at the time of writing, the FTSE AIM index has fallen 23% year to date which is marginally better than the 29% fall experienced by the FTSE All share and broadly in-line with the 22% fall of the S&P500 index respectively. Where smaller less-liquid companies generally bear the brunt of any market sell-off, this is a surprising outcome and very different to what we experienced during the Financial Crisis of 2008-9. It could also reflect the prevalence of many investors in AIM holding shares for Inheritance Tax planning purposes, who are obliged to display more patience.

The impact of the coronavirus is clearly going to be more meaningful for world economies than originally anticipated. Certain sectors are going to experience a challenging period over the next few months as expensive assets remain under-utilised and staff need paying.

Thankfully, Fundamental portfolios have no exposure to oil and gas and resources companies, where even the blue chip names have seen their share prices fall significantly more than the overall market. Shares in Royal Dutch Shell are currently down 41% year to date pushing the forecast yield to 12%, if those forecasts are to be believed!

With recessionary fears now uppermost in the minds of many we are adopting a cautious stance to bargain hunting on the stock market. While some shares appear oversold, this is often for good reason given the questionable short-term outlook and need to support a hefty debt load and interest bill.

We are long-term investors (not short-term traders) and remain focused on investing in businesses whose balance sheets and cash flows offer the desired support in the short term and where there is no immediate risk of debt and interest burdens causing financial distress.

Many of our portfolio companies have the comfort of being in a strong net cash position, whose cash flows are reasonably predictable and continue to support meaningful dividend payments. From our perspective any bargains will therefore need to meet the key criteria of a strong balance sheet and reliable cash flow.

There is no modern precedent for the ‘Corona Crash’ which has the potential to materially disrupt our way of life over what will hopefully be a relatively short period. As the virus spreads, nobody is sure of how or when it will end. Markets dislike uncertainty and therefore the current volatility could continue for some time yet.

We remain confident in the long-term prospects of our investee companies and the markets will inevitably rebound. As we have communicated previously, at some point this can create opportunities to buy companies at irrationally low prices.

As the end of the tax year approaches please don’t forget to use your ISA allowance. There is no requirement to invest cash immediately, which can simply be held on the account to invest at a later time.

If you would like to discuss potential opportunities please email or call Chris or Stephen on 01923 713890.


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Opportunity Knocks!

Saudi Arabia’s move to swamp the world with cheap oil has sent oil prices down as much as 30%, with global equities also crashing.

As the stock market mayhem ensues, the 10-year US Treasury yield has fallen to a record low of 0.32%, ironically only adding to the appeal of good quality companies with robust balance sheets. Who in their right mind would want to lend to the US government for a meagre 0.32%!

Excellent companies, with no direct connection to the oil price, briefly saw their share prices experience significant falls. Experian (LON:EXPN), a provider of data and analytics solutions, saw its share price fall 30%, before recovering to settle down 6%. This sort of irrational behaviour is manna from heaven for long-term investors like us.

Oil and gas companies and anything related have experienced greatest weakness, with the share prices of Royal Dutch Shell (LON:RDSA) and BP (LON:BP.) down more than 25% at one point. Thankfully we don’t invest in these relics of a bygone era!

IG Group (LON:IGG), the online trading platform for equities and derivative instruments, which should be doing nicely from all the increased volatility, experienced system difficulties in the mayhem, which won’t have gone down well with clients seeking to trade the volatility.

A lower oil price will be helpful to the beleaguered airline groups, who are experiencing a sharp drop in passenger numbers because of the coronavirus, and its noticeable that shares in Easyjet (LON:EZJ) and Dart Group (LON:DTG) only suffered modest share price falls as the oil price sank.

With plenty of other priorities in the short term, notably a well-funded response to the coronavirus, in the current circumstances we fail to see how the new Chancellor can put forward a responsible Budget later this week.

As the stock market rollercoaster continues excellent buying opportunities will appear for those with available cash and who haven’t used their annual ISA allowance. Our model and bespoke portfolio services are well-positioned to benefit from this.


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Coronavirus encourages stock markets to take a breather

The indiscriminate sell-off in global equities due to the spread of the coronavirus has, not surprisingly, resulted in material weakness across Fundamental portfolios in the current quarter.

As is usual in these circumstances, the selling has been indiscriminate and even companies considered traditional safe havens have seen their share prices fall. Smaller companies as always have felt the brunt of the sell-off, as have those businesses most directly affected by the impact of the virus.

Diageo, the global drinks group and a constituent of our Ultimate Stocks portfolio, has warned how the virus is affecting its business with global sales now expected to be between £225m and £325m lower than they would have been otherwise. Though meaningful, that’s relatively small in the context of a business which generated sales of £12.8bn last year.

Apple, a long term portfolio holding, previously warned that it would fail to meet its quarterly revenue target of $63-67bn due to temporarily constrained supply of iPhones and a dramatic drop in Chinese shoppers.

Airline, hotel and leisure sectors have been hardest hit with the share prices of portfolio holdings easyJet, Dart Group, Hostelworld Group and Booking Holdings suffering material falls over the past few days. The proposed IPO on AIM of Meininger Hotels, a European hotel and hostel operator, could certainly prove challenging in the current climate.

Portfolio holding Walt Disney Co has also seen its shares slide as its theme parks in Hong Kong and Shanghai have been temporarily shut down. News that Bob Iger, its highly-regarded CEO of the past fourteen years, is also retiring sooner than expected (although he had already extended his stay) also came as a surprise.

Long term holding Microsoft is dealing with the outbreak by donating generously to the recovery efforts in China. That includes RMB 40m worth of products, services and solutions to equip frontline hospitals and medical workers, as well as providing free cloud services to mitigate the impact of the outbreak for businesses and students.

In the gloom of the stock market rout it was pleasing to see price comparison group Moneysupermarket.com report excellent results with a 9% increase in revenue and 10% increase in profits as it reaped the rewards of a diverse product offering. This business continues to display many of the characteristic we look for in an exceptional company.

At the smaller end of the scale, the share price of Ramsdens has also been particularly weak. This company has been enjoying strong growth from its foreign exchange offering which will clearly suffer in the short term as fewer people travel from UK. However, it will also be a beneficiary of the soaring gold price which has climbed to its highest level in seven years.

If there is one positive from the outbreak of the coronavirus, it is that global healthcare systems have been alerted to the need for better contamination control. It’s hardly surprising therefore, that the share price of legacy AIM portfolio holding Tristel, a specialist manufacturer of infection prevention and contamination control products, has climbed to new highs over recent weeks. While it could be a big long-term winner from greater investment in global infection prevention, the share price appears to have become a little over-heated. You can read a full commentary on Tristel’s progress from our associates Investor’s Champion here.

We remain happy with our selection of excellent companies, which will continue to generate growing profits and cash for many years to come. Contrary to what is implied by the current sell-off, they certainly haven’t all turned into bad businesses overnight.

With the US stock market having recently scaled all time highs, a pause in our opinion was long overdue and we view a correction at this point as beneficial to the long-term health of stock markets.

Equity investment should be viewed as a long-term exercise and, unless investors have a near term requirement for cash, see no reason to run for cover at the first sign of short-term difficulties.

We anticipate further weakness in global equities over the coming weeks as the coronavirus spreads inexorably around the world, as unfortunately seems likely. However, human nature is such that, when things ultimately settle down, people will be keen to get out and enjoy life once more. Where applicable, we will therefore look to buy and add to selective holdings as opportunities arise.


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Why are UK investors reluctant buyers of US listed shares?

We are puzzled why many UK investors appear reluctant to acquire shares in some of the best known companies in the world, preferring to delegate responsibility to some mediocre fund manager via a collective investment vehicle, which often has hundreds of holdings, many of which are also mediocre.

The US stock market’s considerable outperformance of the UK market, over virtually any long-term time period you care to mention, appears to have gone unnoticed by many UK investors.

While the FTSE100 index of leading UK shares has risen 31% in the past 10 years, the US S&P500 index is up nearly 200%. We acknowledge that these returns exclude dividend income and the UK market has always offered a higher yield, however, even factoring in dividends, that’s a still a huge outperformance.

The FTSE250 of mid capitalisation stocks, which is supposed to be a better reflection of the UK economy, has ironically generated superior returns to the 100 index, climbing over 100% over the same period, however, this is still meaningfully lower than the US. Fundamental Bespoke portfolios have benefited from some wonderful mid cap success stories with Games Workshop, the designer and manufacturer fantasy miniatures, the pick of the bunch over the past few years.

If one is seeking to achieve superior investment returns it seems logical to fish in more abundant waters and the US market is stocked with a rich variety of fantastic companies, many of which will be familiar to UK investors.

Apple, the largest listed company in the world, whose products and services are ever-present in our lives, is one of the easiest companies to analyse and understand. Why wouldn’t you buy shares in a company whose product you have become so dependent on ? Microsoft is another familiar name whose software most people use every day but which bizarrely won’t be found as a direct holding in many UK equity portfolios. We appreciate the products and financial excellence of Apple and Microsoft, both of which have been long term holdings of Fundamental Bespoke portfolios.

Our new Ultimate Stocks portfolio aims to simplify the process of investing in great global companies, some of which are listed on the UK market, but the majority on the US and other well-regulated overseas markets.

The portfolio contains 25 companies, many of which are popular with their consumers and in high demand. We’re on the hunt for quality and real organic growth which can provide excellent returns for shareholders over the long term.

Investors in our Ultimate Stocks portfolio will benefit from holding shares in some fantastic global businesses, full visibility of holdings, minimal transactions and low fees.

To find out more please contact Chris or Stephen on 01923 713890 or email [email protected]


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Fundamental’s elephants are galloping fast

It’s been a big week of announcements from many of our portfolio holdings and some our large cap companies are putting their smaller peers to shame, delivering stupendous growth.

As the world’s largest online payments provider with the fastest growing mobile platform, Fundamental Ultimate Stocks Portfolio holding PayPal Holdings (US: PYPL) was bound to benefit. The fast-growing US giant added 37.3 million active accounts in the three months to December 2019, increasing its total customer number to 305 million. If PayPal keeps up this pace of growth, it won’t be long before it processes over $1trn of payments in a single year.

The rising number of AirPod wearers is reflected in the fact that Apple (US: AAPL) reported a 36% increase in revenues from its wearable devices business in the final quarter of 2019. Meanwhile, continued demand for the higher priced iPhone 11 drove sales higher at the company’s largest division with iPhone revenue up 8% to $56bn in the all-important Christmas quarter. The only disappointment in a record quarter for Apple was the services division, where revenue growth of 17% was below expectations and down from the 18% growth reported in the three months to September 2019. It’s incredible to think that 17% organic growth from a 40 year old company valued at US$1.4 trillion could be considered as being below expectations.

The data revolution to cloud hosted subscription-based services is already being reflected in the financial performance from long-term portfolio holding Microsoft (US:MSFT). In its fiscal second quarter to December 2019, the company reported a 14% increase in revenues to $36.9bn, driven by demand for cloud services across multiple product suites. Azure, the company’s cloud services and data centre platform reported a 64% increase in sales with cloud revenues now contributing a little over a third of total group sales.

It wasn’t all good news from our portfolio companies with results from UK listed Unilever (LON:ULVR) and Diageo (LON:DGE) hampered by the changing tastes of the modern consumer.

Diageo’s interim results reflect the trends of the wider alcohol market: consumers are drinking more posh booze, but less overall. Volumes were flat on the previous year, but net sales rose 4% to £7.2bn.

Changing tastes and price hikes were also an issue for Unilever where more than half of the 2.9% increase in revenues reported in 2019 was driven by higher prices. Like Diageo, demand for Unilever’s products is being upset by changing tastes of the modern consumer: the everyday cuppa is out, herbal tea is in. Thus, PG Tips and Lipton have joined the growing list of out-of-fashion brands which Unilever has put under “strategic review”.

Focus on the future stretches beyond the product portfolio at both companies. Diageo and Unilever recently topped the FTSE 100 responsibility index compiled by media group Tortoise, which highlights the main ESG (environmental, social and governance) investing principles.

You can read a full analysis of both Diageo and Unilever in the Ultimate Stocks Portfolio section of the Investor’s Champion website. Fundamental clients have complimentary access to the premium content on the site.

Contact Chris or Stephen at Fundamental Asset Management on 01923 713890 for information about our general investment portfolios, investing in some great global companies. 


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AIM review of 2019 and small caps to consider for 2020

In this year-end interview with Jeremy Naylor of IG markets, Chris Boxall, co-founder of specialist investment manager Fundamental Asset Management, considers the performance of AIM in 2019 and offers his thoughts for the coming year

Will AIM’s growth stocks continue to deliver in 2020 or could there be bigger returns to be made from recovery candidates?

Chris discusses several companies which made the headlines in 2019 as well as others who are struggling to attract investor’s attention.  Could the laggards of 2019 be the stars of 2020?

You can find out more about Fundamental’s AIM portfolio service, including the latest fact sheets, from the link here.

Fundamental Asset Management has delivered exceptional investment returns investing in AIM for Inheritance Tax planning purposes for more than 15 years.


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AIM stocks rally on Conservative landslide

The Conservative election victory, supported by progress with the US/China trade negotiations, triggered a strong rally from stock markets, with the UK index of 100 leading shares up just over 1%, the UK mid-cap index surging over 3% and US stocks hitting record highs. The AIM index was up just over 2%, but who were the biggest winners on our AIM portfolios from this short term ‘Boris bounce’?

Anything associated with housebuilding, construction and infrastructure spending had a terrific day, with notable risers from our AIM portfolios  Breedon (construction materials) and Nexus Infrastructure (infrastructure services to UK housebuilders). Having struggled in the first half of the year, Nexus announced its full year results this week with a strong order book offering plenty of encouragement for the future.

Shares in Adept Technology, which provides managed IT services to over 100 councils, NHS trusts, schools and other government bodies, also rallied. The share price of this excellent business, which generates plenty of reliable recurring revenue and cash, has struggled to make much progress over the past few months. With the election out of the way and a more stable political outlook hopefully it will start to attract greater interest.

Highly rated foreign exchange brokers Alpha FX Group and Argentex will have had a busy time supporting their clients in the face of a rising pound, but their share prices barely moved today. With many predicting that the pound will continue to rise over the coming months their services should continue to be in high demand from corporate clients needing help managing foreign exchange exposures.

RWS Holdings, the intellectual property support services and localization provider, was a notable faller on the day. AIM’s 8th largest company announced excellent results this week but warned that, having previously benefited from positive exchange rate movements, currency is proving less supportive at the start of its new financial year. A resurgent pound won’t have helped sentiment in the short-term but this terrific business has weathered far greater currency storms over the past 10 years.

For further information on Fundamental’s high-performing AIM portfolios and thoughts on winners and loses from the election please contact Chris or Stephen on 01923 713890. You can download fact sheets and other information from the Publications section here

While the UK market was clearly the main focus of attention for many, a US listed company which we hold on some of our general portfolios stole the show for us and highlights the terrific investment opportunities available on overseas markets. Adobe will be well known many through its free Acrobat software which is used to read PDF documents, however, there is clearly much more to this creative and digital media software business. This US giant has delivered tremendous growth over the past 3 years and now boasts a market capitalisation of $150bn. Despite its huge size Adobe has just reported a 24% growth in like-for-like annual revenue to $11.17billion and 15% growth in earnings per share. And who says elephants can’t gallop!

Adobe is also a constituent of Investor’s Champion’s Ultimate Stocks Portfolio which you can find out more on from the link here.