17th December 2014
If you are planning to review your portfolio in the New Year and need some inspiration, take a look at these stock tips which the experts believe could outperform the market in 2015.
Brewin Dolphin has provided its top 12 picks and and The Share Centre has given its top six.
Brewin Dolphin’s are:
1. National Grid
“National Grid could outperform the UK market if investors continue seeking low risk, growing income yield. We like the company due to its relatively high regulated returns, lengthy revenue visibility (out to 2021), relatively low political risk and good prospective growth to its regulated asset value.
“Regulatory risk is low for National Grid. Network charges make up a small proportion of consumer bills (around 13% of energy bills) but are system critical. In addition, it has an unprecedented length of regulatory clarity. Its regulatory settlements began in April 2013 and will last eight years until 2021 under the new RIIO regime. Ofgem has said that it does not plan to reopen or change finalised regulatory settlements. As a result, it can give long term guidance.
“Between 2014 and 2021, it expects the regulated asset value (RAV) to grow by 5-6% per year. It also expects the dividend to grow at RPI inflation or greater for the foreseeable future. National Grid’s UK profitability is not impacted by volumes or power prices.”
“Vodafone should outperform if European revenue growth trends improve and as capital expenditure normalises, after the current period of ‘catch-up’ capex. European revenue growth has been falling but we expect trends to improve over the next two years driven by reduced regulatory headwinds (not controversial) and a lower competitive environment, as many of its disruptive competitors are now making very poor returns. One potential positive catalyst is an IPO of the Indian business which is possible in 2015.”
“The reform of the stamp duty system in the UK (39% of 2013 sales, 29% of 2013 profits) will have a positive impact on Kingfisher’s UK business in our view. Indeed, we expect the UK home buyer to use the stamp duty savings on DIY items, as well as new kitchens and bathrooms. In France (39% of sales, 49% of profit), we expect a modest recovery, although price pressure is likely to remain. The self-help measures (increase direct sourcing and commonality) should generate further cost savings.”
“With a large exposure to equipment directed to shale gas and oil, it is unsurprising that the fourth quarter of the year has been tough for Weir, due to the sudden and vast decline in oil price. Whilst the oil price could remain low for longer, we see several positives in Weir. Firstly, we expect the aftermarket and services to pick up the slack in the Original Equipment market in Oil & Gas. Secondly, Minerals aftermarket remains strong and we expect Mining capital expenditure to trough in the next 18 months. Furthermore, Weir is a nimble company, which is prepared to cut costs rapidly if business declines.”
5. Aberdeen Asset Management
“Aberdeen Asset Management is weathering the slowdown in emerging markets better than most. Its excellent cost control and good asset retention has helped to maintain profitability in difficult markets. The purchase of Scottish Widows Investment Partnership will help diversify from its emerging markets focus, improve its cash flow still further and boost its presence on the world stage (it is now one of the world’s largest asset managers). We expect to see share buybacks from next year but are being paid to wait with a solid dividend in the meantime.”
6. Lloyds Banking Group
“Lloyds is the low cost provider of UK banking services with leading positions in several areas. It has established the UK blueprint on transforming a bank with legacy issues into a more sustainable and profitable franchise. Trading on a modest multiple of normalised earnings, we believe that Lloyds’ valuation does not reflect the quality of the franchise. We expect that the resumption of a dividend should eventually allow the stock to re-rate. While you wait, Lloyds will continue to generate a best-in-class normalised return on equity.”
7. Kier Group
“Kier Group has become a well-balanced and integrated business – Construction accounted for 33% of profits, Services 53% and Property/Homes 14% in 2014. The combined order book is now more than £6bn and stretches out to 2022, with more than 90% of the forecast revenues for the Construction and Services divisions for 2014/15 secured. In Construction Services, Kier has a broad spread of businesses in the UK and also has overseas interests in Hong Kong, the Middle East and the Caribbean. It is achieving operating margins of over 2% from this division. Investors also gain an interest in the fast-growing affordable housing and regeneration markets.
“Kier management has set, in our view, an achievable management target of double-digit growth in earnings every year to 2020. The yield of over 5% is also attractive.”
8. Berkeley Group
“Berkeley Group’s business model is unlike those of the other quoted volume housebuilders. It predominantly develops brownfield sites in London which are largely forward sold. Such sites require complex planning, higher working capital and longer timescales. As a result, Berkeley limits its production to around 4,000 units per annum to maintain operational control and match its business risk to market conditions. Hence it has very good forward visibility.
“The delivery of a number of key schemes in a controlled fashion in London over the next few years will fund the return of £13 per share in dividends as the housing cycle peaks, leaving a sustainable rump business ready to benefit from the next upturn. Management has a good record in calling the cycle and we expect returns to be maintained.”
“Having underperformed the market for much of 2014, the Wolseley share price began to gather momentum in the third quarter as the downward revision in consensus earnings estimates over the last 18 months came to an end. While Central European markets (including France) remain weak, the US businesses are now getting a real boost from positive new residential and repair markets. Although municipal and state-funded work is still slow, demand from the water sector is now coming through and the signs look good for the next two years.
“Wolseley’s key businesses continue to take market share. The US operations have produced double-digit growth for two consecutive quarters and margins are still increasing as the business model continues to be refined. This is a story about the US at present, but Wolseley has a robust business with an excellent management team and a good corporate culture which will minimise the likelihood of any trading shocks. The focus on gross margins and cash, as well as keeping overall expenses under strict control, is likely to result in further steady and reliable growth.”
“In 2011, SEGRO set out its new strategic priorities. These were to reshape the existing portfolio, improve asset utilisation and build critical mass in its target markets in the strongest locations across Europe. Good progress has been made with disposals ahead of target, reinvestment into modern warehouses and the creation of a joint venture to increase the group’s exposure to European logistics.
SEGRO is now well placed for growth as the economic environment improves and the investment market for prime industrial property strengthens, particularly for internet delivery solutions and data centres. While asset sales reduced earnings in the short term, dividends and net asset values are expected to increase significantly from 2015 onwards.”
11. National Express
“We believe that National Express has the potential to outperform next year for the following reasons:
“Recovery of the Spanish coach business following a spate of heavy discounting from modal competition (Rail), which is not sustainable going forward, partly due to indebtedness of the rail operators.
“Less exposure than peers to political risks that have emerged in UK bus business. Going into the election year, we have heard from the Labour party of their plans to increase regulation of bus networks outside of London. This is essentially to bring it more in-line with the Transport for London style operating model. While we agree the model works effectively in London, it is unarguably a special case when compared to the regional cities. Proposals have so far been little more than political rhetoric but it is likely that any changes would squeeze the margins of those bus operators outside the capital. While National Express does have regional UK bus operations, they are less exposed than competitors particularly Stagecoach.
“A small but very well run UK rail operation (the C2C Essex Thamesside franchise) could lead to further wins in rail, which, in our opinion, the market has not priced in. This would be post-2015 as NEX did not bid for the Transpennine or Northern franchises, which will be awarded next year.
“Strong record of generating free cash flow, steady growth in US school bus and this all helped by very little costs headwinds, particularly fuel, going forward. ”
“In our view, Informa has the highest quality journal publishing business (Academic Information), with a core focus on Science, Technology, Engineering and Medical publications. On top of that, it also has a strong Events & Exhibitions business, with management exiting smaller events and tilting the portfolio toward larger events in key verticals and geographies. The Business Intelligence business has been weak but management has developed a plan to turn this business around and we are confident that it will be able to do so. With the shares trading on a one-year forward P/E of just 11.5x, we believe that the upside from management’s strategy is not priced in.”
Separately, Sheridan Admans, investment research manager at The Share Centre, selects six stocks that he believes will prosper in 2015:
1. James Fisher
“James Fisher provides a range of marine specialist services which can be integrated into contract packages for oil rigs, wind farms, transporting oil, wharf operations and marine equipment, creating an expertise and limiting competition. It is an investment idea for growth investors, looking for a company that provides niche services around the globe.
“The group has benefited from contract wins with oil companies not only in the North Sea region, but also Africa, Asia and South America. Furthermore, the decline in the oil price is not expected to impact trading at the group’s offshore oil division, as the majority of work is linked to maintenance and production, rather than exploration.
“Directors recently bought shares and an improving cash flow could have the potential to boost dividend growth. We are keen to highlight the long term attractions of the company and recommend them as a ‘buy’ for investors in 2015.”
2. Taylor Wimpey
“With the housing fundamentals looking good and an improving UK economy, 2015 could be a good year for construction company, Taylor Wimpey. A number of house builders look good value on a number of metrics at present and we recommend the group for medium risk investors looking for growth.
“The group has been investing in the land market since 2009 and now believes it has
optimised its land bank. With the Help to Buy scheme extended to 2020, the low price of oil and the potential for wage growth, the group looks set to benefit.
“Results reported in November saw Taylor Wimpey upgrade its guidance on operating margin growth expectations for 2014 by 4%, as it sees the UK housing market growing steadily and sustainably. The company continues to focus on delivering a strategy which it looks set to achieve and this year’s performance has enabled it to add a further £50m on top of the £200m it expects to return to shareholders in July 2015.”
3. Telecom Plus
“Utility provider Telecom Plus reported consistent positive results in 2014, as well as a 25% rise in adjusted profit and a 15% increase in new customers. Most importantly the proportion of customers taking the entire package of services doubled, which in turn improves the visibility and quality of earnings.
“The group provide an alternative to the usual well known utility suppliers for gas, electricity, telephone and broadband services. As a possible beneficiary of the upcoming general election, this is one of the few companies in the sector that could experience significant earnings growth along with market share and customer numbers.
“Telecom Plus is a stock for medium risk investors seeking a balanced investment. The group’s past growth record and strong return on capital profile has not gone unnoticed and resulted in a premium rating relative to the sector.”
4. Breedon Aggregates
“As a provider of materials to the construction and building industry, Breedon Aggregates has seen margins improve, helped by lower costs, stable pricing and acquisitions. The outlook for construction, especially in the housing market, is looking more positive and the company continue to benefit.
“The company has positioned itself to benefit from any pick-up in the economy and demand for its products, leading to a number of acquisitions. These acquisitions should not only help expand Breedon’s geographical presence in the UK, but also make a significant and growing financial contribution to the company. As management remain upbeat regarding its future, we recommend Breedon Aggregates for high risk, long term investors in 2015.”
“Pharmaceutical giant, GlaxoSmithKline’s solid income and good long term research and development prospects make it a good recommendation for 2015. It is a core holding for many portfolios due to the defensive nature of the sector and the stock, and the competitive yields paid to investors.
“One of the key attractions of the group over other large pharmaceuticals is the promising pipeline of drugs coming through, with the last two years having a very good level of approvals and this trend expected to continue into next year.
“We recommend GlaxoSmithKline based on the longer term prospects from its product pipeline, along with the stability and dividend income the stock provides. The hoped for future improvement should be helped by new products, diversification and increasing exposure to emerging markets.”
“Anpario, a provider of natural feed additives, is a small UK company trying to build a name for itself in a competitive international market. Whilst this may ward off some investors, the groupalready has a respectable geographical spread helping offset regional, financial and geopolitical concerns.
“The ever growing global population and improving living standards in developing countries should only increase demand for meat and fish. Improvements have been made to production plants, a pipeline of new products is set to be launched in the future and management are pleased with the growth in Asia and the Americas.
“Given the niche market Anpario operates in we recommend the stock as one of our high risk picks for the longer term.”