So how did our 'Winners' perform?

Thursday, 3rd December 2015 09:56 - by David Harbage

This article seeks to review the progress of the 20 stocks which were flagged as possessing growth potential in the 30 October blog entitled 'Identify, and run your winners'.

The attached schedule shows current earnings and dividend yield looking forward a year or so, together with broker recommendations and recent performance data.

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Over the past month there have been a number of factors that have impacted the market. On a macro basis, there has been heightened geo-political tension post the atrocities surrounding terrorist activity in Paris. Closer to home, the Chancellor's Autumn Statement had minimal immediate impact on markets but the less austere tone may boost consumption and be welcomed over the medium term. There have been a plethora of corporate announcements of both trading updates and M&A transactions.

Within our portfolio, based on their performance over the past month, the following companies merit particular mention:

Greene King – the stock rose 13% to head the FTSE250 leader board today as interim results (24 weeks to 18 October) beat analysts' forecasts. The headline numbers from the Bury St Edmunds based pub operator and brewer were boosted by the advice that integration of the Spirit Pub company was proceeding ahead of schedule. Like for like sales were typically 2% higher and a 6.3% hike in the dividend maintains GNK's longstanding track record of progressive dividend pay-outs. Broker upgrades are anticipated - potential earnings of 72p would put the shares on 13.4 times for 2016 - to merit retention. After rising 20% in the last month the shares appear 'up with events'.

British Telecom has been another strong performer in recent weeks, following the publication on the 29 October of solid results featuring a 13% increase in the interim dividend. Investors were encouraged by confident noises surrounding the rollout of its fibre network; net additions rose 21% to reach 5m homes or businesses connected and 10m premises are targeted by 2020. The prospect of expansion via the mobile platform (the Competition & Markets Authority have provisionally agreed to BT's acquisition of EE) and media/TV (BT Sport added a record 106,000 net additions) is exciting, but primarily should be seen as a means of the telecom incumbent retaining customers. But, like a number of the companies featured within this 'Run your Winners' List, the shares are not cheap and require further progress in profits to propel them higher.

Aviva - as an owner or manager of stock market assets, the company benefits from a rise in equity valuations (via higher, ad valorem based, fees). The FTSE100 index rose by almost 6% over the past month and the life assurer represents a geared play on such capital advances. In addition, investors were encouraged by the 29 October interim management statement, whose numbers were boosted by the 10 April acquisition of Friends Life. Excluding faster synergies on the latter, the core business showed progress ‘across the board’: in life assurance (£2.2bn of net inflows in the first nine months of 2015), general insurance (a lower/better combined ratio of 94%), asset management (good relative returns and growth in asset worth) and S&P agency upgrading the credit rating. Notwithstanding November's double digit appreciation, AV appears set to participate in any seasonal 'Santa rally'.

WPP - enjoyed support from at least 7 sell side brokers over the past month. Barclays, Exane BNP Paribas, Jeffries, JP Morgan Cazenove, Kepler Capital Markets and Macquarrie all issued research featuring Outperform or Buy recommendations - with share price targets ranging from 1520p to 1785p. This media giant has grown both organically and by regular deal-making, with the latest trading update - covering the third quarter of 2015, and aided by bolt-on acquisitions - beating sales and profit margin expectations. Further purchases to maintain WPP's momentum and global industry leadership were made in Holland, South Africa, the UK and the Middle East in November, but the month's most worthwhile acquisition is likely to be the world's largest independent buyer of digital media, Essence. The stock is rarely cheap (concerns about management succession, post Sir Martin Sorrell, can provide ‘wobbles’), but earnings upgrades appear the 'order of the day'.

Amongst November's negative returns, the house builders stood out as weak performers as one or two brokers (notably Liberium) suggested investors 'take profits'. Sentiment was mixed after Mr Osborne announced an additional 3% stamp duty on second homes (restraining appetite from the Buy-to-Let sector) in April 2016, offsetting positive noises about overcoming supply 'bottlenecks'. Bovis announced planning delays on big sites and labour shortages, within its 19 November trading update, leading to a 7% retreat in its shares on the day. A case of revenue and profits deferred rather than lost, but a negative surprise - amongst a backdrop of overwhelmingly positive feedback from its peers - nevertheless. Berkeley Group are due to announce interim results on 4 December, and perhaps management will comment on whether overseas investors and institutional private rented sector investment can take up any slack in BTL demand.

easyJet shares retreated in the face of the budget airline's full year results which fell short of the City’s best expectations. Fears that the company could jeopardise its recent improvement in operating efficiency (evidenced by August's load factor of 94.4%) as it plans to add another 36 aircraft to the fleet (to be delivered between 2018 - 2021) held sway. Concerns about air safety, as terrorist activity appeared to have brought down a Russian airliner flying out of Egypt, also represented a considerable 'headwind' on investor sentiment. Having acknowledged that, the company appears well managed and positioned, compared to its peers, to benefit from the longer term trend towards increased air travel by UK consumers.

Finally, the shares of Rio Tinto continue to underperform the wider market, extending a 15 month lag (were £35+ in August last year), as metal and mineral prices remain under pressure. Incidentally, this year's projected 148.5p dividend is covered by earnings of circa 173p but, in 2016, forecast EPS is set to fall 14% to 148.6p – which does not cover the anticipated (by consensus of broker research) 152.2p dividend. No rush to buy this mining giant in the short term.

Written by David Harbage for lse.co.uk on the 3rd December 2015

 
The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.