Stocks to buy and sell as summer ends

Look outside, summer's over! This typically heralds the end of an unpredictable few months for financial markets and a marked improvement in liquidity. The return of City big hitters can also trigger greater volatility, however, so investors keen to exploit opportunities must have their wits about them.

Remember, September is the worst month of the year for shares, with the odds of a positive return for the month put at less than 50:50, according to The UK Stock Market Almanac.

Take your pick from this year's potential bombshells - North Korea, Trump, Brexit, a banking crisis or central bank policy mistake somewhere. Any of these could trigger a stampede from risk assets to safe havens like gold and the Japanese yen.

But the longer-term outlook for equities remains positive. A significant increase in interest rates from historically low levels is not imminent. At the same time, the global economy is ticking along while not overheating, which means shares should continue to outperform many other asset classes.

There are, of course, plenty of variables, and many companies have had a good run this year. It's why valuation multiples in parts of the market do look stretched.

We've had a few horror stories, too - stand up Carillion, Imagination Technologies, Telit Communications, and more recently Provident Financial and Dixons Carphone.

But despite these high-profile crashes and a market that's been largely rangebound since mid-May, investor sentiment has remained broadly positive. With the pound currently steady against the dollar, traders have been happy to step in and buy the FTSE 100 at around the 7,300 level.

So, for now, it's a case of 'buy the dips'. But some stocks will be a better buy than others, and certain shares a more obvious sell.

To help investors decide, Sebastian Jory and James Ashley, in charge of strategy and stock selection at Liberum, have compiled a Conviction List detailing the broker's Top 10 buys and sells.

And there have been some big changes since the last review.

SSP Group makes it into the Top 10 buys. The firm, which runs food and drink outlets in airports and train stations, is a "structural winner, uniquely placed to capitalise on global investment in travel infrastructure and the trend towards convenience food", argues analyst Anna Barnfather.

High quality earnings and greater momentum deserve a premium, which is why she raises her price target to 600p, implying more than 10% potential upside from here.

ZPG, owner of property website Zoopla and comparison service uSwitch, also gets the nod as Liberum's Ian Whittaker upgrades the shares to 'buy' with target of 450p, about 30% above the current price.

"We believe that ZPG's diversified strategy provides the opportunity to drive sustainable growth throughout the cycle and benefit from the structural growth of two end markets [property portals and price comparison websites]," he says.

Predicting 15% earnings per share compound annual growth rate between 2016 and 2020, and on a price/earnings (PE) ratio of 20.6, ZPG trades on a peer best PE/Growth (PEG) ratio of 1.3 times.

European manufacturers Siemens (earnings risk) and SKF (concerns over pricing and margin expansion) get the boot. UK firms still on the list include Balfour Beatty, GlaxoSmithKline, Howden Joinery, ITV and TP ICAP.

And there's plenty of activity on the 'sell' list.

Anglo American replaces Rio Tinto as the top mining sell. "Cheap valuations show the market doesn't believe current commodity prices are sustainable, we believe that they will go even lower," writes analyst Ben Davis.

"We maintain our bearish commodity outlook into 2018 as demand in China decelerates with ongoing credit tightening and slowing fixed asset investment, causing spot [free cashflow] yield to fall to 2%."

Domino's Pizza has been out of favour recently, and there's little reason to own the stock, argues Liberum. "With risks rising, competition getting tougher, and franchisee profitability on the decline, we think a further re-basing of expectations is required."

Doorstep lender Provident Financial may have bounced back sharply from the recent crash, but the share price is still significantly lower than they were early last week, and "the pain is not over", according to analyst Portia Patel.

"The CEO has gone, Home Credit [profit before tax] has been slashed, the dividend has been suspended and Vanquis is subject to an FCA review," she points out. Earnings forecasts have also been slashed, there's a possible funding shortfall next year, and Liberum's net asset value estimate is just 487p.

Pets at Home is the last new 'conviction sell'. It's already down 26% since Liberum cut its rating to 'sell' a year ago, but remains a value trap.

"Trading momentum was better in the Q1 update (August), but it is still early days. At this stage, we do not see the valuation [PE 12.7] as cheap vs wider UK retail and the dividend yield of 4.3% does not pay enough for a turnaround that could take three years to deliver any meaningful growth in profits."

Halma, Hargreaves Lansdown, Intu Properties and Pearson remain on the list, but Burberry and Marks and Spencer drop off. Both remain 'sells' with targets of 1,350p and 250p respectively, although Liberum believes "recent strategic reviews have improved the risk-reward profiles".

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.