Shares to buy, hold and sell: Charles Luke
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.
Charles Luke is a senior investment manager at Aberdeen Asset Management, where he has managed the Murray Income Investment trust since 2006. The £434 million trust focuses on high-quality, UK-domiciled companies. It is up 55.4% over three years and currently pays an income of 4.72%.
Here are the latest stocks he has bought and sold and the one he's holding on to.
"The pharmaceutical sector has faced problems in recent years. Research and development has been poor, and the sector has faced competition from generic drug companies as patents have expired. However, the resulting lack of love for the sector has created buying opportunities.
"GlaxoSmithKline has a number of strengths that the market has overlooked. It has an attractive consumer healthcare business, which is showing high single-digit growth. It also has a diverse business: it makes Ribena, Lucozade and Horlicks, while just 23% of its revenues come from white pills sold in Western markets. Its strong vaccine business, which is less exposed to competition from generic producers, also makes GSK attractive.
"In recent years, GSK has exited product areas such as antidepressants, where it believes it has no competitive advantage, to concentrate on research and development in its strongest areas. The group now has an exciting pipeline of drugs, which are due to emerge from trials over the next 18 months. Some 20% of GSK's revenue comes from emerging markets, and this part of the business is growing at 15% a year.
"As emerging countries develop, their citizens demand better healthcare. GSK sells vaccines to their governments and consumer healthcare products to citizens.
"GSK is trading on an attractive valuation. Its share price is around 11 times its 2012 earnings and it offers a 5% dividend yield. We are very much in the get-rich-slowly camp looking at quality businesses that can grow their earnings over time. GSK fits with that ethos."
"This firm is well positioned in the aerospace industry. It makes jet engines and turbines and holds several exclusive contracts. For example, it is the only engine supplier for the new Airbus 350. Its lengthy exclusive contracts mean it offers lots of clarity on its future earnings. Its order book now sits at £61.4 billion.
"The group expects to double its revenues over the next 10 years. This should bring it some supply-chain benefits. It will also benefit from its after-market sales, which tend to have higher margins. It has always had a strong balance sheet and currently holds £1.5 billion in cash.
"These are all reasons why we like this stock for the long term. However, it is a 'hold' rather than a 'buy', as the shares have performed very well and now look expensive, at around 14 times earnings."
SELL: ARM HOLDINGS
"ARM is a quality company. It designs the microprocessors that are the 'brains' in our smartphones and it is arguably the leading technology company in the UK. For 15 years, it has done extremely well. Its business has strong barriers to entry, which puts it in a strong position, and it has a robust balance sheet.
"But it is very expensive. It currently trades at 47 times its 2012 earnings. The firm is growing its earnings fast, but there are risks on the horizon. Its customer base is consolidating, while the convergence between smartphones and laptops may disrupt its business. Meanwhile, Arm's main competitor, Intel, is gaining ground.
"ARM's share price reflects expectations that the Alternative Investment Market will grow significantly in a number of areas, continue to gain market share, sell an increasing number of units and achieve higher revenue per unit.
"We tend to be buy-and-hold investors and usually only sell out if the story for a company changes materially - if there is a profits warning or a company makes a poor acquisition, for example. But ARM is now too expensive for us to continue to hold."
A catch-all phrase that can range from assessing the price of a property or vehicle before offering it for sale or the net worth of assets in an investment portfolio to the prices of shares on a stock exchange.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
A property chain is a line of buyers and sellers (the “links”) who are all simultaneously involved in linked property transactions. When one transaction falls through – for instance, someone can’t get a mortgage or simply withdraws their property from sale, the entire chain breaks and all the transactions are held up or even fail entirely.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
Alternative Investment Market
AIM is the London Stock Exchange’s international market for smaller companies. Since its launch in 1995, 2,200 companies have raised almost £24 billion listing on AIM. The market has a more flexible regulatory system than the main market and can offer tax advantages to investors but its constituents are a riskier investment than bigger companies listed on the main market.