Stocks to watch in June
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The high street is an unhappy place these days. Across the country one in seven shop units is empty, and those that remain have to contend with competition from a glut of charity shops.
On top of that consumers feel squeezed by higher taxes, inflation and the threat of unemployment. Then there is the little matter of online shopping to deal with.
Successful investors know, however, that the darkest hour is just before the dawn. Many must now be wondering if some of our leading retailers are oversold.
Dixons Retail (the name changed from DSG International last September) is the extreme case of a retail share on its sick bed. Back in 2007, the shares were trading above 200p. Now they languish in the penny stock category at 12.72p. Can they start to recover from here?
A profit warning at the end of March from chief executive John Browett was a body blow. Some analysts now think the pre-tax profits from the company - to be revealed on 23 June - may be as low as £80 million, compared with £112 million last time.
But Browett is now taking an axe to the business - cutting out smaller and older stores, slashing capital spending and selling off Spanish and Scandinavian interests.
The golden days of Dixons may never return. In 2006 it made a profit of more than £300 million. But it still has huge sales (£8.5 billion for the year just ended), compared with a market value of only £460 million. Four of the 22 analysts who follow the stock rate the shares a 'strong buy'. Do they have an eye for a bargain?
Transport group Wincanton's shares plunged in November in the wake of disappointing half-year figures and the decision to replace chief executive Graeme McFaull with Eric Born. The shares - down from over 200p in November - now sit at 114.75p.
Broker forecasts for the next couple of years are quite hopeful. One analyst rates the shares a 'strong buy', while consensus forecasts suggest profits of £35.6 million for the year just ended and further modest progress for the next couple of years.
The worry is that directors will decide to trim the dividend so shareholders share the pain of the cost-cutting programme. The yield on the shares - currently 8.48% - may come down to a more realistic 7.2%. Still an attractive return.
POLAR CAPITAL HOLDINGS
Polar Capital Holdings, an AIM-listed specialist investment management company, has a 'strong buy' signal from three brokers who follow its fortunes. Polar runs 16 different investment funds with assets under management totalling about £3.5 billion.
The emphasis has always been on technology, but expansion into other specialist areas is under way with a rapid increase in funds under management.
In the two years to March 2010, profits fell from £14.5 million to £3.13 million, reflecting the market turmoil in 2008/09. But profits for the year just ended are expected to rise to £8.6 million. Brokers forecast further rises this year and next.
By 2013 they expect the dividend to have doubled to 9p a share, putting the shares at 136p on a prospective yield of 6.6%.
A reassuring trading update from Hyder Consulting at the beginning of April left brokers Panmure Gordon still enthusing about the prospects for this global design consultancy, which earns 80% of its profits overseas. Panmure is one of four brokers touting Hyder shares as a 'strong buy'.
The company is involved in highway construction in Queensland (flooding) and sewage treatment in Bahrain (political unrest). But these projects, which are back on track, make up only a modest share of Hyder's total business mix.
The shares are up from 241p to 369.5p in the past year, but were as high as 452p before the market got nervous about its activities in the Middle East. Now, Panmure has set a target price of 445p for the shares.
Profits for the year just ended are expected to reach £19.85 million (£13.47 million after tax) and to continue their upward trend over the next two years. The dividend record is progressive.
FULLER SMITH AND TURNER
If you had bought shares in West London brewers Fuller Smith and Turner 10 years ago, you would have seen the value of your investment multiply tenfold. The brewer is a steady, rather than spectacular, performer, but there is no doubting the quality of the management or the products.
Profits are expected to rise from £26.8 million to £28 million in the year to March and to keep on rising for the next couple of years. The shares are not cheap - selling on a forward earnings multiple of 16 and yielding a smidgeon under 2%.
Latchways, a specialist in safety systems, is back in favour with investors. After two years of declining profits, for the year just ended the group is expected to post record pre-tax returns of £9.2 million.
Bullish brokers think the group can make more than £10 million pre-tax this year and £11.4 million next. The shares slumped to a low of 400p at the beginning of 2009, but now change hands at 1035p.
With two thirds of its products exported and strong growth in North America, Latchways has found a formula for success. The shares yield 3% and sell on 14.4 times prospective earnings.
Spotlight on Daisy Group
Shares of AIM-listed Daisy Group have been going nowhere in the past couple of years - trading between 84p and 110p. They now change hands at 94p as the market waits for this telecoms group to deliver on its growth promises.
The company has, through a string of acquisitions, been building itself up as an independent supplier of all aspects of telecoms to small and medium-sized businesses. The half-year bulletin showed revenues surging from £31 million to £120 million as those acquisitions made their impact.
Now analysts believe the group is about to break into profit. At the half-year stage there was a pre-tax loss of £9.8 million, but after disposals that translated into a net profit of £1 million.
At any rate the consensus forecast from the five analysts who follow Daisy is that profits for the year to March will work out at £34.6 million, compared with a loss of £16.2 million, as revenues race up to £265 million from £134 million last year.
For the current year the forecast is for profits of £44.08 million on revenues of £314 million, suggesting earnings per share of 12.27p and a forward multiple on the shares of 7.6.
Four of the five brokers suggest Daisy shares are a 'strong buy'. But Andrew Darley of finnCap worries about the problem of maintaining revenues in acquired companies while cutting costs.
This article was taken from the May 2011 issue of Money Observer.
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%.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices 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.