All good things come to an end, and so has The Independent’s winning streak in beating the FTSE 100 with our annual 10 shares to follow.
We’ve had a good run: I’ve edited this feature for more than six years and during that time it has outpointed the FTSE 100 on every occasion. Until now.
I described last year’s portfolio as our “Turnaround Ten”. Sadly, it was wrecked by a combination of the continued weakness in commodity prices, and a number of recovery plays that didn’t recover.
Quite the reverse.
The once high-flying Tullow Oil arguably sits in both camps. There was a brief flurry of interest in the stock as a bid target after the announcement of Shell’s $70bn (£47bn) takeover of BG in April, but that proved a mirage and Tullow’s 60 per cent loss on the year makes it our worst selection –and a contender for the worst in a decade.
Sadly, it wasn’t alone. In total we had five losers – and while that means we also had five winners, they didn’t do enough to paper over the cracks. Tesco looked good early on, but the mini revival sparked by new boss Dave Lewis was snuffed out in a matter of months.
There will also be no cigars for Serco’s Churchillian boss Rupert Soames after a profit warning in December capped a dreadful 12 months. Aberdeen Asset Management, meanwhile, suffered from the weakness in markets in South- East Asia and an inability to stem fund outflows, and while we thought Partnership Assurance might be a takeover target, it ended up doing an all- share merger with Just Retirement (the completion of which has been delayed) that did nothing for the share price.
On the plus side, the portfolio was rescued from ignominy by our very own Ben Chu, whose selection of Hargreaves Lansdown produced a 48.8 per cent gain on the year. The firm helps investors manage their finances and is proving one of the big beneficiaries of the Chancellor’s reforms of pensions, annuities and savings generally.
Nick Goodway’s Secure Trust Bank proved there is life among the challengers to the big banks with a 16 per cent gain, and other winners were luxury goods outfit Mulberry, Ladbrokes –ahead of its merger with rival bookie Coral – and the drugs group AstraZeneca (just).
Tips for this year
And so to this year. As ever, The Independent’s writers submit their suggestions and I get the job of picking the final runners and riders.
This year we will once again take a few gambles because, as the huge range in our experts’ FTSE predictions demonstrates, uncertainty is the order of the day – there is no consensus on how the markets will perform. However, the first pick is a safety-first one from the redoubtable Mr Chu.
This is National Grid (937.5p). Shares in the highly regulated energy-transmission and distribution utility went nowhere in 2015, yet it delivered steady growth in revenue and kept costs under control. The most recent results showed earnings per share grew 22 per cent year on year. Buying National Grid is basically a wager on continued UK economic growth and a return to moderate inflation. It seems to have been punished for its association with the energy sector, yet it does not face the same challenges as the big oil and gas generators in the wake of the international climate change deal to curb emissions. Its US operations, which generated a fifth of operating profits in the first half of 2015-16, provide an element of geographical diversification too.
Nick Goodway has another challenger bank up his sleeve, Aldermore (231.5p). Now almost back down to its March 2015 float price of 192p, the shares have been as high as 318p. Former Barclays executive Philip Monks set up this outfit in 2009 and has built a low-cost bank serving the growing buy-to-let and small business markets. Expect more help for challenger banks from the Treasury this year.
Is it crazy to pick a second bank? With apologies to the bard, now is the Bill Winters of our discontent. Standard Chartered (563.7p) can be made glorious summer by this son of JP Morgan next year – we feel the new man can start to push the company out of the doldrums. The shares have been hammered and trade at around half of the bank’s book value – incredibly cheap if you buy into a Winters turnaround story. With a difficult rights issue out the way and emerging markets at their nadir, the company’s new streamlined structure should result in a business that is more adept at doing fewer things but better.
Our bet on Ladbrokes turned out well in the end and we’re suckers for the gambling sector. But this time around we’ll put our money on online bookie 888 Holdings (182.5p). Dealmaking is de rigueur in the sector, which operates in a world where betting taxes and regulation are biting; witness Paddy Power’s merger with Betfair and Ladbrokes’ tie-up with Coral. 888 has been on the fringes of the party so far. The firm’s Israeli founders turned down a £700m, 203p- a-share, bid from William Hill in February and they were right to hold out as the shares are not far away from the offer price after a 30 per cent rise this year. But the rationale for a deal still exists; bookies need scale and 888’s marketing expertise is the envy of the industry. The casino business would also fit snugly into William Hill’s online operation. Then again, 888 could look elsewhere to bolster its sports book – maybe through a deal with the private equity owned SkyBet. Either way, the company is going places.
Builder Galliford Try (1,525p) hit a five-year high in September before the shares came off sharply. They have started to rise again and with good reason. This is a company that has been picking up a string of contract wins in the education and defence sectors. Its housebuilding business has been seen as a disappointment compared with its other operations, but there is reason to think that can change, not least because of its operations in the affordable homes sector, which serves an urgent need in the UK. A new high in 2016? Galliford Try has plenty of land and plenty of opportunity.
We are also backing another construction business, albeit of a rather different sort – Severfield (65p). Yes, three years ago, the structural steel company lost millions on the City’s Cheesegrater skyscraper, had a rescue rights issue and sacked the boss. Yes, the shares slumped and haven’t done very much since then. But under new leader Ian Lawson, things are turning around. Severfield returned to the dividend list last month and has upped its game on tendering and project management, fattening profit margins. Construction companies can be risky for investors as you’re only ever one bad contract away from disaster. This isn’t one for widows and orphans, but 2016 might just be Severfield’s year.
We always like to include something from the junior market so step forward Alliance Pharma (43p). The niche healthcare business is about as safe as it gets on the AIM – it even pays a dividend. It has a strategy of snapping up products that are no longer priorities for big pharma, and its recent £132m purchase of Sinclair IS Pharma’s dermatology business is seen by City investors as a big step-up, with the company entering the US and Asia-Pacific for the first time. Its track record is very solid, and the shares are some way off the highs recorded earlier last year. We think it can be a winner in 2016.
Another small-cap stock that is going places is posh wallpaper and fabrics maker Walker Greenbank (202.5p). The shares peaked at 245p in the summer but have come back, not least after its Lancashire factory was flooded in Storm Desmond. But the company says it is fully insured, including for a profit shortfall. This is a business that should be on a luxury goods rating and it will either achieve that in 2016 or be taken over at a tasty premium.
We’re giving Mulberry (945p) a second run-out. It has been trying hard to win back customers after an ill-fated upmarket push sent product prices soaring and alienated its core UK customers. But its turnaround plan seems to be working, with the business returning to profitability in the six months to 30 September, aided by new management. And 2016 is set to be an exciting year. New creative director Johnny Coca will unveil his first collection for the label at London Fashion Week in February; Mulberry has not shown a full collection at the event since September 2013. It was a winner for us last year and could easily be in vogue with shareholders in 2016.
Finally to Rio Tinto (1,959p). The natural resources sector has not proved a happy hunting ground for us, but Rio finished the year on a note of optimism, with steel prices rising. While this may not last – China has built up its inventories – Rio is a low-cost producer that analysts think can still make profits even if iron ore prices fall as low as $30. It has some interesting projects in development, and, while we’d be cautious, if you’re going to take a punt on this sector then this represents one of the safer bets. Moreover, it yields a forecast 7.5 per cent, indicating that the market expects a dividend cut. That isn’t a certainty given Rio’s relatively strong balance sheet, and if the payment is held the shares could be due a rerating.
And eight top tips from the professionals
Kames Capital’s head of UK equities, Stephen Adams, was the star turn of The Independent’s 2015 line-up of expert share tipsters. This time last year he said of Esure: “2015 is likely to mark the trough in motor insurance rates, which should underpin the significant dividend yield premium on offer at Esure.”
It was hardly plain sailing for the insurer – the shares took a nasty knock in the summer from a surge in small motor claims. However, while the market in which it operates remains tough, Esure has been forcing through price rises.
Changes in which way dividends are taxed have also led to speculation that investors could enjoy a special dividend in 2016, on top of an already generous yield. This saw Esure finish the year up 24 per cent – the best performer among our experts’ six winners.
Unfortunately from the perspective of the portfolio, two big losers exacted a very high price. Oil explorer EnQuest suffered from the rock-bottom price of the commodity while engineer Weir is heavily exposed to both the oil and mining industries. The pair both endured declines of more than 40 per cent, causing the experts’ portfolio to finish the year in the red. That said, the performance of their eight was only a tad below that of the FTSE 100 and was considerably better than that of The Independent’s team of tipsters.
Our experts could not have been more divided in where they thought the FTSE 100 would end the year, their forecasts ranging from a bullish 7,100 to a bearish 6,000. Bearish was the way to go, and Simon Bragg, chief executive of Oriel Securities, came closest with 6,200.
On to this year’s line-up – where the FTSE predictions range from 5,900 to 7,200, indicating another choppy year ahead – and a quick note so that members of our panel don’t have the regulator breathing down their necks. This exercise is meant to be fun and should be read in that spirit. Before investing your own money in shares, you should thoroughly research the companies you’re interested in and take professional advice if required.
Stephen Adams, head of UK equities, Kames Capital: Just Eat (493.7p)
“This is a real beneficiary of shifting consumer habits in the takeaway market, namely the move to online ordering. While Just Eat trades at a significant valuation premium to the wider market, this is more than justified by the dominant positions it holds and the growth rates available both in the UK and internationally.”
FTSE prediction: 6,500
Tom Elliott, international investment strategist, De Vere Group: Lloyds (73.07p)
“A strong dividend is being promised by the bank, which will be eagerly sought by income investors fleeing the resources sector. The Government will do all it can to ensure regulators don’t come down hard in the run-up to, and aftermath of, next year’s retail share offering. They will be urged to turn a blind eye to a balance sheet and business model hopelessly reliant on rising house prices.”
FTSE prediction: 5,800
David Buik, market commentator, Panmure Gordon: Vectura Group (176p)
“This is a biotech that may have a couple of patents agreed in 2016. The drug sector is constantly looking for ‘add on value’ companies and this is one of a few sectors I feel upbeat about.”
FTSE prediction: 6,000
Chris Beauchamp, senior market analyst, IG Group: Redrow (470.1p)
“After a 53 per cent return in 2015, it might seem as if shareholders have had the best of it. But with housing demand in the UK still strong, and no end in sight to the chronic lack of supply, there is still room for further appreciation. With a forward multiple of just nine times earnings, Redrow looks to offer reasonable value.”
FTSE prediction: 7,200
Garry White, chief investment commentator, Charles Stanley: BAE Systems (499.6p)
“Europe’s largest defence group sells into five main regions: the US, the UK, Saudi Arabia, India and Australia. Following a number of years of government cutbacks, the outlook for military spending is looking much better and the geopolitical backdrop supports the view that BAE will return to earnings growth in 2016 and beyond.”
FTSE prediction: 6,400
Ben Ritchie, manager in the Dunedin Income Growth Investment Trust: Vodafone (221p)
“We expect Vodafone to enjoy the benefits of increased customer data usage, faster growth in its emerging market businesses and improved cashflow in 2016 as the significant recent investment programme begins to wind down. This should allow it to grow earnings and enhance its already generous dividend.”
FTSE prediction: 5,900
Christian Gattiker, chief strategist and research head, Julius Baer: Reckitt Benckiser (6,281p)
“We like Reckitt’s ‘best in class’ track record for organic growth and margin progression. We expect it to continue to outperform its peers.”
FTSE prediction: 6,500
Steve Clayton, head of equity research, Hargreaves Lansdown: Whitbread (4,401p)
“Shares in the owner of Costa Coffee and Premier Inn are down around a fifth from their peak. But third-quarter results showed like-for-like sales growing across each brand, and overall sales rising by double digits. The group also has a 40-to-50 per cent expansion target by 2021.”
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