Shares to buy, hold and sell: Jeremy Thomas
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.
Jeremy Thomas is chief investment officer of UK equities at RCM, a division of Allianz Global Investors. He also manages the £57 million UK Growth and £35 million UK Equity funds for the group. Here are the latest stocks he has bought and sold, and the ones he's holding onto.
"Petroceltic is a £250 million oil and gas exploration company listed on the Alternative Investment Market (AIM). Its assets are mainly in Algeria and Italy.
"It has a good management team with credibility drawn mainly from Tullow Oil. The growth potential comes from a large oil field in Algeria, which it is currently appraising and is a very exciting prospect. The group is co-invested with Italy's largest power company, Enel.
"The shares for Petroceltic are trading at around 9-10p each, against a net asset value of around 25p.
The company has cash on the balance sheet and the share price is fully underwritten by the value of Enel's own share price. As a result, much of the potential upside is 'free'.
"We always ask ourselves what is our 'edge'. Why is the market price wrong?
"We think the market is troubled by the potential for unrest in the region, given the recent events in the Middle East.
"In contrast, we are quite happy with the government and political environment in Algeria. This type of stock has also suffered from the fallout from the BP crisis.
"The company has significant earnings outside the UK, but that is not our motive for buying this stock. We want shares in which we can have an edge and add value. We are often looking for things that are off-benchmark, that have not been discovered by other managers yet and this is a good example of this type of stock."
HOLD : MOTHERCARE
"Mothercare has underperformed the wider market by 40% since 2009. Its market capitalisation is now £350 million, yet its international profits are £30 million. Therefore, the market cap as a multiple of international profits is not bad at all. Even if the UK business is at break-even, there is scope for gains.
"The way Mothercare makes its international profits is by selling franchised products. It sells goods to the retailer and the retailer takes the risk. It has a 15% margin, there is no cash employed and it is very cash generative. The international business is growing at 15-20% per year and it is not unrealistic to think that it could make £50-60 million by 2014. So, £350 million to access that growth doesn't seem very much.
"It has some fantastic joint-venture partners, particularly in Latin America. It is also present in the Middle East, where it has 1,000 individual franchises. It is also building more joint venture partnerships in China and India.
"In the UK, the problem is that there are too many stores in the wrong places. But the management now seems to be getting to grips with the issues. There is no doubt that this could have been done quicker, but Ben Gordon, the chief executive, has done great things. We have had a meeting with the head of international operations and are convinced the company knows what it's doing. There are also other good things going on, such as a deal with Boots.
"The negative sentiment surrounding Mothercare has given us an opportunity to buy in at attractive prices."
SELL: RECKITT BENCKISER
"This is a £24 billion manufacturer and distributor of consumer branded goods. The economic environment has generally favoured this type of company, which has been our main motive for holding the shares. It also had a strong management team and the price was pretty reasonable.
"However, the valuation is not 'cheap or reasonable' anymore, which is our main criteria for holding any stock.
"It recently lost chief executive Bert Brecht and chief financial officer Colin Day and we felt that this was a clear signal from management. It is a good quality business with a good return on equity, but with a little less emerging market exposure than some of its peers. The valuation is OK, but it is likely to get more generic competition and its shares are not worth as much as they were.
"There are two reasons why there is upside in any share: either the profits are wrong, or the multiple that the markets are attributing to those profits is wrong. In Reckitt's case, neither is wrong. As a result, we don't see much upside in the shares and believe there are more opportunities elsewhere."
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.
Net asset value
A company’s net asset value (NAV) is the total value of its assets minus the total value of its liabilities. NAV is most closely associated with investment trusts and is useful for valuing shares in investment trust companies where the value of the company comes from the assets it holds rather than the profit stream generated by the business. Frequently, the NAV is divided by the number of shares in issue to give the net asset value per share.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
A standard by which something is measured, usually the performance of investment funds against a specified index, such as the FTSE All-Share. Active fund managers look to outperform their benchmark index. Cautious fund managers aim to hold roughly the same proportion of each constituent as the benchmark, while a manager who deviates away from investing in the benchmark index’s constituents has a better chance of outperforming (or underperforming) the index.
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.
A way of valuing a company by the total value of its issued shares and calculated by multiplying the number of shares in issues by the market price. This means the market capitalisation fluctuates continually as the value of the shares change in the market. For example, HSBC has 17.82bn shares in issue at a price of 646.2p making a market capitalisation of £115.15bn.