Shares to buy, hold or sell: Tom Walker
Walker bought into US drug manufacturer Mylan in March as part of his wider play on global healthcare providers. Like many other investors, Walker believes that ageing populations in the developed world combined with the rising cost of healthcare will continue to provide unique opportunities in the pharmaceuticals sector.
Mylan is one of a rising breed of drug manufacturers that provide low-cost 'generic' drugs, or reproductions of those developed by larger pharmaceutical firms that are no longer patent-protected.
Best known for the Epipen, an auto adrenaline injector that treats moderate to severe allergic reactions, Mylan is one of the biggest generic drug manufacturers (GDMs) in the US, with a market capitalisation exceeding $33 billion (£22 billion).
Despite its scale and past successes, however, Walker says that Mylan is currently trading on a price/earnings (p/e) ratio of just 13 times compared to a wider US market average of around 20 times, with good potential for earnings growth.
"GDMs often do trade at a discount to the market, but we think that Mylan could produce 10% annual earnings growth over the next five years, and if it does then the potential for a sharp re-rating is very great," says Walker.
The firm currently occupies 1.5% of Walker's 50-stock portfolio and is already paying dividends; as at 9 April Mylan is trading at $71.50 (£48.79) per share, close to $10 per share above the price at which he bought in less than a month ago.
HOLD: CVS HEALTH
US pharmacy and convenience store chain CVS Health has been a sporadic constituent of the Martin Currie Global Portfolio trust since its inception in 1999. During that time the company has undergone some fairly radical changes, chief among them its merger with prescription service provider Caremark in 2007.
The deal created CVS Caremark, the firm's pharmacy benefit management (PBM) arm, which provides prescription benefit management services to over 2,000 health plans and now accounts for around a third of CVS's total operations. Walker describes the deal as initially "shaky", but he believes US healthcare reforms will lead to strong growth in this part of the business.
On the retail convenience store side, the manager claims that although CVS's decision to stop selling tobacco and rebrand as CVS Health at the end of last year created a temporary dip in sales, trading seems to be picking up, aided by the US's continuing economic recovery.
"CVS is a company that has good visibility – it's almost a staple in the US. It is also growing its top line at around 5% a year, with earnings per share up around 10% a year. Management are doing a good job and there is probably upside to earnings and growth expectations from here," says Walker.
However, at a price of 17 times earnings, the manager believes the firm may be fully valued at the moment, which is why he is holding rather than buying at its current $100 per share price tag – almost double what he paid in May 2013.
SELL: ROYAL DUTCH SHELL
Perhaps unsurprisingly, Walker recently sold oil and gas major Royal Dutch Shell. He last bought into the stock in February 2005 and it soon became a top holding at around 5% of the total portfolio; however, he says he has been reducing his holding for some time, selling out fully in February.
Walker says the sale was part of a systematic reduction of his oil and gas exposure, which before the sale was slightly overweight at 17% of the portfolio compared to 15% of the trust's benchmark, the FTSE World index. He is now underweight the sector, which he has concerns about following the recent rout in the price of oil. He is also sceptical about the oil majors' ability to maintain their dividends.
This is particularly the case with Shell, which Walker criticises for its lack of transparency in explaining how it would keep paying its current 5.6% annual dividend yield. "When Shell released its fourth-quarter results in January, a lot of people didn't think it was being forthright about its cuts to capital expenditure, paying off debts and explaining how it was going to maintain its dividend over the next two years," says Walker.
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%.
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.
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.
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.
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.