Interactive Investor

Stockwatch: 2016 tips review and analysis

23rd December 2016 09:46

Edmond Jackson from interactive investor

It's been a strong year for companies in the Stockwatch sights, reflecting both contrarian/cyclical and racier growth plays. Overall, it affirms a flexible approach to identifying value in big and small stocks alike, with alertness to bias in the market trend - whether sentiment brews positive or negative.

For example, the cyclicals were boosted amid quantitative easing (QE) from 2012 especially, but ran into deflationary fears early in 2016 followed by the EU referendum.

There's an entire such sector, recently a source of takeover bids. Conversely, very high valuations have been achieved by specialist online retailers, a dearth of good quality growth stocks serving to squeeze them higher. They may continue to outperform, but are exposed to any setback in underlying fundamentals versus a scant dividend yield.

Meanwhile, the chief risk with cyclicals is profit warnings if Brexit conspires to tip the UK economy after its long upturn since 2009.

Turnaround/cyclical stocks:

RSA Insurance Group

I drew attention to re-rating potential in the FTSE 100 shares of RSA Insurance Group from 480p after first-quarter results showed profit ahead of internal expectations and directors were buying stock; 2016 being RSA's last year of a restructuring.

Dividends had resumed and special payouts were targeted for 2018. The stock has risen to 570p and continues to look a sound hold given strong recovery in earnings expected for 2016 and about 22% growth in 2017. A 3.4% yield is covered about 2.4 times.

Home Retail Group

The Argos owner's mid-cap shares were a long-term favourite from 80p given a discount to assets, cheap price/earnings (PE), useful dividend and directors' buying – despite Home Retail Group being one of the most shorted on the London market.

Marketing-wise, I also noted Argos's capability for click-and-collect; a chief rationale for Sainsbury's buying Home Retail for 171.5p a share and now integrating the Argos format into larger Sainsbury's stores as a means to boost all-round sales. There was also bid rivalry from a South African-owned international retailer, affirming under-valuation.

Premier Farnell

Another mid-cap example of how negative bias can lead to value: I drew attention to electronic components distributor Premier Farnell in September 2015 as a stock to average into with a 5% yield in support. At the time it had tested multi-year lows around 105p despite the underlying business being an industry leader.

A takeover became contested with a US-based IT company paying 185p per share to trump 165p from a Swiss industrial component maker. This is a prime example of how sector-leading cyclicals are in focus for trade buyers after sterling's devaluation especially against the US dollar.

Anglo Pacific Group

Non-index coal mining royalties stock Anglo Pacific has rebounded with the commodity: I drew attention at 73p last May with the directors buying and a prospective yield of 8.2% the market refused to believe. However, after the recovery to about 130p the prospective yield tests 6.5%, notionally 2.4 times covered by 2017 forecast earnings.

The future largely depends whether China continues to manage its way through economic challenges: barring any major upset the stock is positioned well on a forward PE of 6.5 times assuming £40 million pre-tax profit in 2017.

Disappointing: Bonmarche Holdings

I fell into a value trap at women's clothing retailer Bonmarche, drawing attention to last June at 130p on a PE of 6 and 5.5% anticipated yield, after good prelims, if cautioning: "Needs to stop being a weather victim".

Indeed, the FTSE Fledgling stock has fallen to 85p after a hot September was blamed for compromising sales of autumn ranges. Brokers expect earnings to halve in the current year to April 2017, although the shares now offer a yield over 8% that is 1.3 times covered by downgraded earnings. This could be a turning point, although several women have told me they would never shop at Bonmarche, so I'll add a caveat to my judgment of female clothing commerce!

Growth stocks

Burford Capital

Litigation finance specialist Burford Capital goes from strength to strength, and is now a £1.5 billion AIM-listed company. I drew attention two years ago at 123p as a "special situation" because legal funding is independent of business cycles and Burford's results were evolving strongly as a leader in this field, however its shares remained below-radar.

I reiterated its attractions last January and August as operating results continued to beat expectations and, post the EU referendum, its US dollar-based revenues/assets (versus sterling-based debts) have enhanced value for sterling-based investors. The stock has continued to rise, especially after buying a similar US business to affirm a market-leading position, and it continues to look attractive long-term.

boohoo.com

I drew attention to online fashion retailer boohoo.com at 33p in November 2015 and again around 100p last July, drawing parallels with ASOS. Both AIM-listed, Boohoo had better growth stock characteristics, being a fifth of ASOS's size and only on about a third of its PE rating. 2016 has involved closing that gap supported by better than expected results which signal a marketing sweet spot.

ASOS has established that high PE's can persist for successful online retailers, and boohoo is now rated similarly on 73 times expected earnings for the year to end-February 2017, reducing to 60 times in 2017/18. Mind, this leaves no room for the story to change adversely, the stock would plunge in response, but in a medium-term context ASOS has shown such drops as buying opportunities.

JD Sports Fashion

I originally drew attention to sports fashionwear and outdoor clothing retailer JD Sports at a pre stock-splits' equivalent price of 36.25p back in August 2010, and multiple times since then, lastly 247.4p equivalent in July. In 2010, it lagged Sports Direct in terms of rating, but was showing similar strong progress, and superior marketing has enabled it to establish leadership.

At about 320p the stock trades on 18 times forward earnings which is fair enough, but European prospects are looking attractive as JD develops on the Continent. The company should weather media criticism about staff treatment at its central distribution facility, so if the stock does fall further it's a buying opportunity.

IQE

AIM-listed advanced microchip materials group IQE has been on a rollercoaster in recent years, as a lull in smartphone demand hurt supply for wireless product. It also has a photonics side that is growing rapidly however, and results/updates during 2016 affirmed this versus a cautious rating, hence the stock has soared from 16p to test 40p in the second half of 2016.

I drew attention at 23.5p in July amid signs of improved trading, and again at just over 30p in October, a latest update affirming good prospects. Due to a volatile history, this stock is on a forward PE in the mid to low-teens, but which should improve as operational gearing from photonics kicks in and the company is seen as less cyclical.

Disappointing: Trakm8 Holdings

I drew attention to AIM-listed telematics/data supplier Trakm8 last October at 152p, allegedly on a forward PE in single figures based on forecasts. I noted the price had fallen 24% since a non-executive director bought; that chartists would wait for a support level, although contrarians might average in considering a PE growth ratio well below 1.0 - i.e. attractive.

However, the stock continued to fall to 95p and is currently at 115p after interims cited lower seasonal profitability and higher investment. The setback could largely be a timing issue with revenues/profits/cash weighted towards the second-half year to end-March, i.e. potentially a 2017 recovery play.

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