Stockwatch: 2015 tips revisited and outlook for 2016

What lessons from 2015 for the year ahead?

Reflecting on Stockwatch's 2015 ideas and looking forward, it's significant how the out-performers are typically in areas of resilient consumer spending - e.g. selective retailers, and housebuilders where the government is subsidising the market via Help to Buy. Fast-moving retail involves casualties, too, in an unforgiving stockmarket.

Special situations - companies able to prosper independently of market trends - are also worth bearing in mind. For example, stocks falling in response to short-term issues can become bid targets, as deflation makes it harder for firms to grow revenues organically.

Moral upshots are: invest in essential industries you can observe daily (it isn't necessary to be a technology expert); run gains where underlying progress supports original reasons for buying; and keep aware of industry risks - especially competition - wherever price/earnings (PE) ratios soar and yields drop, putting such stocks at the mercy of bad news.

British retail: a perennial source of vigour

It's a fluid environment prone to surprises, yet consumer confidence has been supported by rising house prices boosting appetite for personal credit. Supergroup is a prime example of innovation, where I drew attention last March at about 850p just as a seasoned professional manager took over as chief executive, enabling the founder to focus on creative work.

The stock was at a 20-month low, an over-reaction to managerial issues, making its PE attractive versus earnings prospects. The price rose to over 1,700p as international expansion progresses, although care is needed due to strong competition, especially now that the stock trades on a forward PE of about 23 and yields a scant 1.3%.

A disappointment has been the plunge in Bonmarche from about 300p to 185p after trading since Black Friday was reportedly "very challenging". The chief executive has also opted to move on. Supergroup and Bonmarche exemplify contrasting ratings among smaller companies generally: winners soar, but even a mild profit warning during the warm autumn/winter for clothing retailers sees a share price slashed. Bonmarche has a sound balance sheet, modest PE and yields near 4% - hence, it will be interesting to see who takes up the reigns. I drew attention a year ago at about 300p and concede the latest news may reflect problems with its shopping format, although the de-rating could attract a bid.

Another innovator prospering is Card Factory, a discount retailer of greeting cards and gifts. I initially drew attention at 210p in August 2014 and the stock advanced to 360p by last June as the PE expanded from about 13 to 18 times, and with a return of capital being mooted, I wrote again to note yield attractions. The price has crept up to 380p and in September the company affirmed a 15p special dividend. Card Factory's ongoing strong cash generation and 5.7% prospective yield makes it still attractive for income.

JD Sports Fashion has risen to a forward PE near 18 times and the prospective yield below 1% with the price up to 1,070p recently. This has been a regular favourite since drawing attention at 256p (equivalent, pre a 4-for-1 share consolidation) in September 2013 on the basis Sports Direct showed the sales opportunity for sports kit, trading on 21 times expected earnings versus 10 times for JD. Like Supergroup and Card Factory, JD is now in vogue with a good concept, and is well-managed, however, its valuation may be high enough, especially if UK personal debt has reached an unsustainable level. Sports Direct owns 7.5%, although a premium for control at current values would be pricey.

Housebuilders and interior fitters

Mind that Help to Buy is distorting the housing market, helping to fuel continued price rises, yet the Conservatives are extending it to 2020 and also easing restrictions on development. Housebuilding may therefore be seen as a riskier investment in some ways, but undoubtedly there remains a shortage of homes - so it's a tricky market to doubt. The extent of trough then recovery-to-growth is shown by Barratt Developments rising from 92p when I made its case in late 2011, to 662p recently.And last January I suggested Taylor Wimpey at 123.5p which has risen to 196p.

Both these stocks offer a 5.6% yield covered at least 1.5 times by forecast earnings, hence downside risk should be limited. Mind they are also both capitalised over £6 billion which makes earnings growth more challenging. It's why I drew attention to MJ Gleesonlast May at 408p. The shares are now 545p, which capitalises the company at near £300 million. Its operations comprise low-cost housing in the North with land-trading for development in the South, and management looks to extend its housing concept more widely.

Moving house or upgrading interiors has meant busy trade for the likes of Howden Joinery which serves the trade for kitchens and joinery - another long-term favourite since I originally drew attention in April 2011 at 112p, then on a single-figure PE.

Last January, I re-iterated its case at 407p with the forward PE in the high teens and the stock has advanced to about 530p - just one example of how government support for housing, and consumers running up debt, is giving cyclical firms "growth" characteristics. Mind that while Howden's forward PE remains about 18 times, projected earnings growth is in the low teens, as if the stock is fully valued. A yield just over 2% doesn't limit downside should news become mixed and active investors move on.

Well-managed pubs offer defensive growth

I continue to cite pub stocks occasionally because the well-managed ones benefit in good and bad times alike: even during the 2009 recession and its aftermath, Brits did not compromise eating and drinking out with friends, and the smoking ban has meant pubs taking share from restaurants. Young & Co is a prime example I have drawn attention to variously since 600p in 2012, and last May when testing 1,125p.

It traded up to 1,310p and is currently about 1,220p. It's on a high PE of 21 times projected earnings and yielding only 1.5%, but it continues at a discount to net tangible assets of 1,366p in last September's balance sheet. Such asset-backing helps explain Young's consistent growth chart and why its AIM-listed stock is a prime candidate for mitigating inheritance tax. It also shows that not all AIM stocks are highly speculative: Young remains investment grade because you can specify a discount to underlying value.

Special situations will continue to arise

It's worth being on the look-out for these, partly as a means to protect a portfolio from unexpected bear phases. The chief risk is straying into too many high-risk cyclicals, just when economies (are poised to) turn down, and/or takeover speculations.

That is a lesson to draw from Anthony Bolton's undoing in the early 1990s when the Fidelity Special Situations Fund took a caning from the recession then. Examples I have drawn attention to include Burford Capital. Originally at 135p in May 2014, this litigation financier is achieving growth irrespective of the wider business cycle. Burford is the leading international firm, hence my re-iterating the case last March at 142p after excellent 2014 results. Its price is currently 192p as the company backs claims against Volkswagen and should continue to grow.

Takeover prospects merit attention when fundamentally sound firms fall out of stockmarket favour amid near-term issues. They are targets for others while it is hard to grow revenues in a deflationary environment, hence takeovers can deliver a step-change.

A good example was last June's acquisition of Anite, a provider of wireless testing for mobile devices, by Keysight Technologies Inc at 126p a share. I had drawn attention in February when an update cited good underlying momentum, and the stock had perked up to 90p from a three-year low of 80p. Anite was out of favour as a cyclical with high operational gearing, but mobile testing is an essential service and Anite is well-regarded - the bid also shows how market valuations can extend too far from industry valuations. Expect to see more such deals as public companies seek to bolster financial performance.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.