Too many stock market investors fail to generate high returns over the long run. Usually, the reason for their failure is not a lack of intelligence or effort, but an underappreciation of the value of simplicity when seeking to unearth the best stocks for their portfolio.

Our rationale for advising readers to buy FTSE 250-listed Cranswick in July 2022, for example, was not particularly complicated. We simply felt it was a financially sound, high-quality business that had a solid long-term growth strategy. Furthermore, we believed it offered good value for money following a sharp fall in its share price.

Since our initial tip, the farmer, producer and supplier of a wide range of foods including sausages, cooked meats and dips has generated a 55pc capital gain. This represents a 42 percentage point outperformance of the FTSE 100 and is 43 percentage points ahead of the FTSE 250’s gain over the same period. When dividends received or declared since our original recommendation are included, the stock has produced a 62pc total return in little more than two years.

In Questor’s view, the company’s shares are poised to deliver further capital gains and index outperformance for largely the same reasons as those given at the time of our initial recommendation. 

Notably, the company’s financial standing remains sound amid an uncertain period for the UK and global economies. Its net gearing ratio amounts to 11pc, which is extremely low compared with other FTSE 350 firms, while net interest cover of around 19 suggests the company could easily afford to make interest payments on its debt should profitability come under pressure in the near term.

A solid balance sheet also means greater scope for acquisitions. Indeed, the firm spent around £46m last year on two significant purchases. Further acquisitions to enhance its competitive position would be wholly unsurprising – especially if company valuations fall amid an uncertain economic outlook in the short run.

The firm’s return on equity of roughly 13pc last year, despite having very modest debt levels, shows that it still has a clear competitive advantage, which should equate to rising profits over the long term. Its vertically integrated business model further differentiates it from rivals and means it is better able to cope with sudden changes in its operating environment.

In its latest quarter, the firm posted a 6.7pc rise in revenue and stated that it is on track to meet previous financial guidance for the full year. This column expects its financial outlook to improve over the coming years as a period of modest inflation equates to less upward pressure on costs, thereby supporting profit margins. Its profitability should also be boosted by efficiencies and productivity improvements being brought about by ongoing investment in automation. 

Further interest rate cuts, meanwhile, are likely to catalyse demand for the company’s premium products. A sustained fall in the Bank Rate, when combined with low inflation, is likely to mean rising disposable incomes in real terms once time lags have passed. In turn, this should prompt consumers to become less price conscious and increase their willingness to trade up to more expensive discretionary items. 

The firm’s financial prospects remain upbeat thanks to significant growth opportunities across a wide range of products, including relatively new areas such as pet food and international markets.

Of course, Cranswick’s substantial share price rise since our initial tip means that it now has a significantly higher market valuation. Then, it had a relatively rich price-to-earnings (P/E) ratio of 15.8. Now, its P/E ratio stands at an even higher 19.6.

Although this means there is less scope for an upward rerating than at the time of our original tip, the company’s shares nevertheless continue to offer good value for money. The firm has solid fundamentals, as evidenced by its strong balance sheet and clear competitive advantage, while its growth strategy remains logical and is set to be turbocharged by an improving operating environment in the coming years.

Simply put, all of these factors should allow the stock to deliver further capital gains and index outperformance over the coming years. Keep buying.

Questor says: buy

Ticker: CWK

Share price at close: £47.65


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