Nine stocks to watch in 2014
19th December 2013 17:41
by Esther Armstrong from interactive investor
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The Federal Reserve has started moderate tapering of quantitative easing in the US and markets have taken it in their stride.
Since the move was originally expected in September, the fact it took until the close of the year means investors have seen ample evidence of a strengthening economy to dampen any withdrawal symptoms they might have shown otherwise.
Elsewhere, in the UK, better growth forecasts have given investors yet more confidence. So it looks like 2014 could be set to be another bumper year for equities.
To find out how the market reacted to the news that tapering will begin in January, read: Market reaction to US Feds taper decision.
Jonathan Jackson, head of equities at stockbroker Killik & Co, shares his top nine stocks to watch next year.
Rolls-Royce
is a world class engineer in supply and maintenance of power solutions for customers in civil and defence aerospace, marine and energy markets.
The group has built up a strong industry position with huge barriers to entry following long-term investment in research and development, production facilities and service capability.
Growth is expected to be driven by increased global air travel, continued concerns over the environment, the expansion of deepwater oil production and increased demand for power.
A huge installed equipment base of more than 54,000 engines provides a source of resilient, long-term, higher-margin aftermarket sales which account for more than half of the group's revenue.
The group has a strong balance sheet and is growing its dividend ahead of the rate of inflation. Current trading is robust and the group is benefiting from its huge order book.
HSBC
is one of the few truly global banks, able to offer full service banking in most regions of the world, with its network covering over 90% of international trade and capital flows. This provides a significant competitive advantage as the group is able to act on both sides of trade flows, for instance in Asia and the US.
The group has a diversified income stream, which will diversify further as earnings from North America normalise. The group has a low-risk balance sheet, with diversified funding and assets, while strong capital provides a buffer against new regulatory proposals. Significant amounts of excess deposits, invested in central bank reserves and government securities, means the group will be abeneficiary of higher interest rates.
There is potential for further cost savings and the prospect of attractive dividend growth.
Unilever
is one of the world's leading suppliers of fast-moving consumer goods, with a portfolio of global and local brands in personal care, food, refreshment and home care.
Brands such as Dove, Lipton and Signal are low-ticket, repeatable purchases, with more than two billion consumers using a Unilever product every day.
The group has an unrivalled emerging markets presence, generating more than half of its sales from those parts of the world expected to experience strong growth in demand for consumer goods as more people begin to consume personal and household products for the first time.
An attractive strategy is focused on growing volume ahead of the market, steady improvement in operating margins, and strong cash flow generation. A strong balance sheet provides the flexibility to invest in the organic growth of the business, make bolt-on acquisitions and pay a progressive dividend.
InterContinental Hotels
is a global hotel operator, with a portfolio of attractive brands, including Holiday Inn and Crowne Plaza, and a strong operating system, both of which generate customer loyalty and pricing power. The group operates a highly scalable, asset-light model, based on franchising and management contracts, with low capital intensity and high returns.
The group is well placed to benefit from the ongoing recovery of the US economy and the increase in the size of the middle class in emerging markets, and their propensity to travel. The company estimates that global industry revenues will double by 2030, with more than 50% of that growth coming from the US, China and India.
The group has a strong balance sheet and a track record of paying a progressive dividend and, from time to time, larger shareholder returns.
Berkeley Group
is a leading UK housebuilder that specialises in delivering complex developments in London and the south east.
The strong political impetus on improving the affordability of housing via the Help to Buy scheme is expected to help drive demand, aided by an expected continuation of low interest rates.
The group's attractive geographic focus should enable it to achieve continued growth in average selling prices (ASPs) and resilient margins through the cycle. Management's continued investment in, and optimisation of, the land bank is expected to help drive ASPs and, in turn, margins and net asset value (NAV).
The group currently has an ambitious plan to return 360p to shareholders by September 2015 via dividends and buybacks. The current valuation is attractive, with the shares currently at 2.3x historical NAV, a 16% discount to their pre-crisis peak.
Quindell
is a provider of technology-enabled outsourcing, primarily to the motor insurance industry.
Quindell's model has been to acquire businesses in key parts of the supply chain to the motor insurance industry, including law firms (that handle the legal side of accident claims), providers of medical services (injury assessment and rehabilitation), and motor insurance claims processing businesses.
By having positions across these historically fragmented parts of the supply chain, Quindell is able to offer an integrated outsourced service to its customers at a lower cost than could otherwise be achieved.
The attractiveness of Quindell's solutions at a time of regulatory change in the industry has, in our view, been validated by the size and quality of customers that it has secured in a short period of time. Despite the strong growth and favourable outlook, the shares remain attractively valued, and a recent £200m equity fundraise has significantly strengthened the group's balance sheet.
888 Holdings
is an online gaming group engaged in the provision of both business-to-consumer (B2C) and business-to-business (B2B) gaming services.
Through its B2C business, 888 operates several high-profile websites offering casino, poker, bingo, sports betting, and social and mobile gaming. The smaller B2B business, which trades under the Dragonfish brand, offers corporate partners a range of outsourced services covering games/technology, marketing, operations and ePayments.
Growth is expected to be driven by further progress in the US, where the group is currently the only gaming provider live in the three regulated states of Nevada, Delaware and New Jersey.
We believe 888's strategic relationships in the US leave it well placed to make further progress as the trend of regulation continues there, most likely on a state-by-state basis.
Meanwhile, current trading in the group's core regulated markets (principally the UK and Europe) has been strong, particularly in casino, and the group has maintained a strong balance sheet, with net cash of $47m (£28.7 million) as at the end of the third quarter.
Amazon.com
is the world's leading internet retailer, and a leading provider of cloud computing services.
Its retail strategy is to offer customers the widest selection of goods at the lowest price, with continuing efficiency gains enabling further price reinvestment. The group is expected to be a key beneficiary of the increasing penetration of e-commerce in developed and emerging markets alike, aided by new product initiatives such as Sunday delivery, drop-off points at London Underground stations and the recently launched Login and Pay with Amazon, which enables seamless payments.
Meanwhile, the continued growth of the Amazon Web Services cloud business is expected to drive margin expansion, having recently gained momentum amongst public sector customers in the US.
The shares currently trade on a 2014 EV/Sales ratio of 1.9x, an attractive valuation given management's consistent delivery of annual revenue growth in excess of 20%.
Volkswagen
Volkswagen (VOW-ETR, €191, Buy) is Europe's largest automobile manufacturer, selling 12 brands, including VW, Audi and Porsche, in 153 countries.
It has an unrivalled emerging markets presence, particularly in the BRIC countries (Brazil, Russia, India and China), and is well positioned to benefit from the upcoming reforms announced at China's recent third plenary session, which will help to drive consumption.
To find out what funds and stocks to keep an eye on to take advantage of the reforms, read: Five funds and stocks to play Chinese growth.
Meanwhile, with passenger sales in Europe beginning to recover, one of the major overhangs on the share price is easing. The group recently announced its capex plans to 2018, and its MQB modular production platform is beginning to deliver significant cost savings.
The stock is currently trading on a price earnings ratio (P/E) of 8.0x, a discount of more than 20% to comparable peers such as BMW and Daimler, an attractive valuation given its more diverse range of products and brands, enabling it to capture an upswing in global new car registrations.
Apple
is one of the world's leading consumer electronics companies, with significant competitive advantages in product design, marketing ability and the ecosystem built up around the iPhone, iPad and iTunes that ensures strong customer loyalty.
This has enabled the group to continue delivering resilient margins, in spite of higher costs associated with new product introductions, which have delivered sales ahead of expectations of late.
A number of positive catalysts lie ahead in the near term, including expansion into potential new product areas, such as TVs or wearable devices, and a potential distribution agreement with China Mobile, the world's largest carrier.
On a 2014 ex-cash P/E of below 10x, the valuation is attractive, and we remain positive on the group's prospects going into the new year.