Many investors waste a lot of time trying to predict the unpredictable.
For example, seemingly every investor currently has their own forecasts of how ongoing economic and geopolitical events will play out.
They then use those estimates to decide where, when and how much to invest.
In reality, the outcome of such “known unknowns” is impossible to accurately predict.
And with the enduring prospect of “unknown unknowns” that history has shown can have a huge impact on share prices, there seems to be little point in spending too much time forecasting the future.
Instead, this column firmly believes that stock market investors should focus their attention on unearthing high-quality companies.
Such firms are likely to be well placed to not only overcome challenging economic and geopolitical events, but also capitalise on more upbeat periods.
For example, engineering company IMI has proved to be a strong performer since Questor first tipped it as a “buy” in March 2019.
Its shares have surged 77pc higher and outperformed the FTSE 100 index by 64 percentage points.
The company’s latest quarterly update showed that it is making progress in implementing its strategy amid somewhat mixed operating conditions.
Revenue rose by 4pc year-on-year in the first quarter, with the company’s restructuring programme on track to generate £15m of incremental benefits in the current financial year and a further £7m of savings in 2025.
Perhaps more importantly, the firm remains fundamentally sound.
Its debt-to-equity ratio stood at a relatively modest 72pc at the end of the most recent financial year, while net interest costs were covered over 18 times by operating profits.
These figures show that the company is in a strong position to overcome a potential slowdown in the world economy as the full impact of previous interest rate rises in developed economies is felt.
Indeed, the growth rate of the US economy, which accounts for nearly a quarter of the firm’s revenue, slowed to an annualised figure of just 1.3pc in the first quarter of the year.
And with the European economy, which expanded by just 0.3pc last quarter, accounting for a further 38pc of the company’s sales, a solid financial position could prove to be a major asset in the short run.
Of course, a continued fall in inflation and pending interest rate cuts across developed economies mean the long-term trajectory of global GDP growth is likely to become increasingly positive.
Encouragingly, IMI’s competitive position remains strong.
The firm’s operating profit margin rose by 90 basis points to 18.7pc in its latest financial year in what was the fourth consecutive year of profit margin growth.
Meanwhile, last year’s return on equity figure of 31pc further evidences a competitive advantage – especially since it was achieved without the use of excessive debt.
This suggests that the company is well placed to benefit from any improvement in the world economy’s growth rate in the coming years.
With a price-to-earnings (p/e) ratio of around 15.2, IMI has a rich market valuation compared with many of its FTSE 100 index peers.
The company stated in its latest update that it remained on track to meet financial guidance for the current year, which would equate to a rise in earnings of 3 to 8pc and a forward p/e ratio of between 14.1 and 14.8.
Its inherent cyclicality means that profitability is ultimately set to be heavily influenced by the performance of the global economy.
As a result, its near-term financial prospects are set to remain relatively uncertain amid the plethora of today’s “known unknowns” that include heightened inflation in the US and Eurozone, prospective interest rate changes and geopolitical challenges.
In turn, this could mean that its share price volatility is greater than that of the wider stock market.
This, though, should not dissuade investors from purchasing the stock. It has demonstrated a solid balance sheet and a sustainable competitive advantage.
In addition, the company’s latest update confirms that it is making progress in delivering on its strategy amid a somewhat challenging operating environment.
Clearly, there is less scope for capital gains than at the time of our original tip in March 2019.
But significant growth potential and index outperformance remain on offer.
Therefore, IMI continues to have long-term investment appeal.
Questor says: buy
Ticker: IMI
Share price: £17.80
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