How our stock tips fared over the last year
Phil Oakley Jan 03, 2013
Overall, markets did well last year. But how did our ‘shares in focus’ tips fare? And what should you do with them now? Phil Oakley reviews the tips he made in 2012.
Last year was a good one for the stockmarket. The FTSE 100 gained around 10%, while the FTSE 250 has surged by over 25%. Over in America, the S&P 500 gained 16%. What’s driven these gains in the face of such a lacklustre economic backdrop?
One factor is that profits at many firms have managed to hold up quite well. But the most powerful influence has been all the money printing by the Bank of England and US Federal Reserve. To an extent, central-bank chiefs Mervyn King and Ben Bernanke have got what they wanted. With interest rates at rock-bottom levels, anyone looking to make any sort of return on their money has been forced out of cash. As they’ve chased the higher yields available on shares, prices have gone up. Fear that money printing will lead to higher rates of inflation has also seen a rush to real assets, including the shares of leading companies.
Now, first and foremost, I try to base my weekly tips on not losing money – as far as I’m concerned, it’s more important to make an ‘absolute return’ (ie, beat inflation) than to beat a specific index. But I have to admit, I underestimated the impact of money-printing this year. The shares of firms that, to me, looked fully priced at the time of review, rose higher than I expected. There’s a saying that you shouldn’t ‘fight the Fed’ or the Bank of England, and that was the case this year.
So, with hindsight, my cautious stance meant missing out on some big gains. Will this continue in 2013? Well, low interest rates may not prop up the markets forever. From here, a lot will depend on whether company profits can keep growing.
In the table below I’ve given an update on all the ‘buy’ tips, how they’ve performed, and what I’d suggest doing with them now, along with a review of some of the other companies I looked at during 2012. For simplicity, we’ve just looked at the capital gain or loss, rather than total return (which includes dividends).
|Company||Date tipped||Price when tipped||Price 20 Dec||Change ||What we think now|
|Royal Dutch Shell
||Buy for divis|
||Buy for divis|
|African Barrick Gold
||Buy for divis|
|London & Stamford
|Tate & Lyle
||Buy for divis|
||Buy for divis|
Transport company National Express (LSE: NEX) saw its share price drop by 15% since I tipped it as a ‘buy’ in March. That it gets a big chunk of its profits from running buses and coaches in Spain has weighed heavily on the shares. Spain is a bit of a worry, but there is still plenty of growth potential, particularly in America. I’d still rate the shares a buy, on a forward price/earnings (p/e) ratio of nine and a yield of over 5%.
Fenner (LSE: FENR) has lost a similar amount. Manufacturing conveyor belts is its big business. As a result, it has been hit by poor sentiment towards the mining sector and concerns about Chinese demand for commodities. But there’s more to Fenner than this. It has lots of niche businesses that are difficult to compete against. The long-term growth prospects for many of these are sound. It is not unreasonable to expect some weakness in the conveyor belt business, but the long-term outlook remains good. On a p/e of 11, the shares are still worth buying.
Bakery chain Greggs (LSE: GRG) has had a tough year. The shares have fallen by 10% since I tipped them in February. The CEO’s departure hurt investor sentiment. Despite a sound business model and lots of improvements to its shops and bakery products, growth looks like it will be hard to come by. The shares could be dead money for some time, so I’d avoid them now.
The success stories
Online auction group eBay (Nasdaq: EBAY) has done well, with the share price up by 27%. The business continues to thrive, with more people looking to sell second-hand goods online, and it’s increasingly becoming a forum for selling new goods too. Its online payments business, PayPal, has lots of potential, particularly on mobile payments. I got out of my comfort zone tipping these shares on a p/e of 21 times. But now, trading at just under 19 times and with profits growing nicely, I’m still a buyer.
Fast-growing utility company Telecom Plus (LSE: TEP) has been a good performer, with the share price up by just over 26%. Its use of distributors who get a cut of its profits has been in tune with tough times, as is its loyalty card, which gives people money off their shopping bills. As a result, customers and revenues are growing, while profits should hit record levels this year. The shares were expensive when I tipped them in May, and they look expensive now on a forward p/e of over 24. It’s a good business, but I’d be tempted to take some profits.
Dairy Crest (LSE: DCG) has seen its share price rise nearly 22% since June, but it is still worth tucking away. It’s got a job on its hands trying to make money selling milk, but it is making the business more efficient. Its brands, including Cathedral City cheese and Country Life butter, have room to grow. The sale of its spreads business means it has minimal debt and can buy more brands.
Ones that got away
Of the stocks I was too cautious on during the year, top of the pile is Next (LSE: NXT). Despite terrible conditions on Britain’s high streets, the shares are up nearly 50% from when I tipped them as a cautious ‘hold’ in January. Next Directory is doing well, while the market liked the firm’s share buybacks and strong cash flows. The shares had done well in 2011 too, but were trading on less than ten times earnings when I reviewed them, which in hindsight looked reasonable value. They now trade on over 13 times. At the risk of being proven wrong again, I’ll say that these shares are high enough for now.
Hargreaves Lansdown (LSE: HL) continues to defy the naysayers. I saw the shares as a nervous hold because of the threat of the Retail Distribution Review (RDR) to its business model. It gets a chunk of its profits from annual trail commissions from fund managers. The RDR has now banned these on new fund sales, but HL will still have lots of cash coming in from its customers’ existing fund assets. Despite the growing trend of DIY investing, its profits could take a tumble in the years ahead. Trading on a forward p/e of 24 times, I view the shares as an outright ‘sell’.
I still like Whitbread’s (LSE: WTB) Costa Coffee and Premier Inn businesses. I didn’t think it was wise to pay the 14 times forward earnings when the shares were trading at 1,845p earlier this year. Nor did most City analysts. Yet the shares are up by a third since then and now trade on nearly 17 times next year’s profits. Keep it on your watchlist and buy on weakness.
I’m more upbeat on Google (Nasdaq: GOOG) than I was earlier in the year. It may be unpopular now due to its tax-avoidance strategies, but its business model is a long-term winner. Its internet search business is head and shoulders above the competition, while its Android operating system is successfully taking on Apple in the smartphone and tablet market. Its profits look more resilient than Apple’s too. I now rate the shares a ‘buy’.
Towards the end of the year, I started looking for riskier shares that might be worth a punt. With these ‘gambles’, I’m looking for shares that are unpopular due to problems that may be temporary. The reasoning is that the shares might be very profitable investments if the firms can sort their problems out. This strategy is similar to ones practised by many value investors. Here’s how they’ve done so far – I’ve highlighted some of the best performers, along with my view on what to do with them now.
|Company||Date tipped||Price when tipped||Price 20 Dec||Change||What to do now|
|Spirit Pub Co
Homeserve (LSE: HSV) was a classic example of a distressed investment. Embroiled in a mis-selling scandal, investors dumped the stock. The shares have rallied strongly as worries about a crippling fine have eased. I don’t particularly like this business and don’t see why people keep handing over money to Homeserve to insure their water-supply pipes. But everything has a price. That said, I’m not sure how it can grow strongly in the future. Take profits.
Trinity Mirror (LSE: TNI) also suffered from poor sentiment. Its regional newspapers are declining; it’s been accused of phone hacking; and there’s a hole in its pension fund. But a new CEO is taking out costs and developing a strategy for the digital media market. It’s also good at throwing off lots of surplus cash. On a forward p/e of 3.6 times, the shares could keep going up.
Northgate (LSE: NTG) is a self-help story. Having over- extended itself in two of Europe’s worst economies (Britain and Spain) and saddled itself with too much debt, the vehicle-hire group struggled to survive. While Spain remains a worry, the business is now being run well with a focus on profitability, cash generation and paying down debt rather than growth. I described Northgate as being very similar to a repayment mortgage – as debt goes down, the value of equity goes up. This should keep profits ticking up. But with the shares having rallied by 17% since November, they no longer look as cheap as they did, so some profit taking may be in order here.
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