Top stock picks for 2013
As we begin a new year, it's only natural for investors to contemplate how individual stocks and stockmarkets will perform.
Throughout 2012, I became increasingly optimistic on the prospects for UK equities and my expectation continues to be that the underlying trend will be a grind upwards in equities over the medium term. That's not to say that any upward trajectory we experience in 2013 won't be subjected to volatility.
I continue to see value in many sectors across the UK stockmarket and seek to incorporate the best ideas from diverse sectors. So, while I seek to achieve a balanced portfolio across my funds, individual stock weightings will reflect my conviction.
Sectors in which, I believe, there are "rich pickings" to be found include UK consumer cyclicals, financials (principally insurers and asset managers) and telecommunications.
Below, I set out some of the companies I think will continue to do well in 2013 and beyond.
Over the past three years Dixons Retail's cost base has been fundamentally re-engineered and its stores re-energised.
Dixons prices are not only on a virtual par with internet-only operators such as Amazon, but the group boasts good-quality customer interaction that comes with its portfolio of stores.
The company's suppliers recognise this and have started to offer Dixons favourable buying terms over internet operators.
The backdrop of a slowly improving UK consumer environment is likely to be significantly enhanced by the group's market-share gains brought about by the demise of its biggest competitor, Comet.
With sales on an improving trend, operational gearing within the business should allow for earnings to grow significantly faster than sales.
A company with significantly less exposure to the UK consumer backdrop is BT. While the business is making good progress in its objective of offsetting declining voice revenues with new data services, the key positive, in my view, is the significant costs still to come out of the business.
Even after topping up its pension pot, the company's cash flows are prodigious and more than capable, I believe, of supporting a rowing dividend from here on.
If I'm right about the direction of the equity market over the next 10 years, then fund-management businesses such as Schroders should see their earnings rise in excess of the UK stockmarket average. Businesses such as these are highly operationally geared.
Given that fund managers charge a fixed percentage on their assets under management, a large proportion of every incremental pound of revenue which they receive falls directly through to the bottom line. With over £1 billion of surplus cash on it, Schroders' balance sheet is extremely low-risk in my view.
I favour the non-voting shares as they trade at a significant discount to the ordinary shares. Once the cash is stripped out, the stock is trading on a price/earnings (p/e) multiple of 9.5 times expected 2013 earnings.
Another interesting financial stock, in my view, is life insurer Resolution. It pays an 8.3% yield at the time of writing, which represents the majority of the business's free cashflow. In common with Schroders, the business would also benefit from rising equity markets as its large group pensions division effectively acts like a fund manager.
While the above stocks are some of my favourites for 2013, an attractive longer-term possibility is Balfour Beatty. Despite the group's profit warning, the result of a poor trading performance in its construction business, the company's three other operating divisions are performing well.
Even though the current outlook for construction looks bleak on both sides of the Atlantic, I wonder if we are in a "darkest before dawn" situation. Irrespective of politicians' desire to provide fiscal stimulus around the electoral cycle, there is a need for significant investment in infrastructure in both the US and the UK.
This investment is likely to have private sector participation, with a probable relaunch of the Private Finance Initiative (PFI) in the UK.
Balfour Beatty has significant experience in executing and taking stakes in PFI projects. Indeed, if we strip the value of its PFI assets from the share price and put the support services and professional services divisions on a P/E multiple of 10 times current earnings, in our view the value of the large construction business looks significantly undervalued.
2012 was a year for the stockpicker and I expect this environment to continue into 2013: I have no shortage of ideas for my portfolios. Notwithstanding the aforementioned volatility I hope to make further progress over the next 12 months.
Martin Walker is manager of the Invesco Perpetual UK Growth and UK Aggressive funds
This article was written for our sister website 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%.
Investors who borrow money they use for investment and use the securities they buy as collateral for the loan are said to be “gearing up” the portfolio (in the US, gearing is referred to as “leveraging”) and widely used by investment trusts. The greater the gearing as a proportion of the overall portfolio, the greater the potential for profit or loss. If markets rise in value, the investor can pay back the loan and retain the profit but if markets fall, the investor may not be able to cover the borrowing and interest costs, and will make a loss. Also used to describe the ratio of a company’s borrowing in relation to its market capitalisation and the gearing ratio measures the extent to which a company is funded by debt. A company with high gearing is more vulnerable to downturns in the business cycle because the company must continue to service its debt regardless of how bad sales are.
This is more usually a feature of car insurance but it can also crop up in contents, mobile phone and pet insurance policies. An excess is the amount of money you have to pay before the insurance company starts paying out. The excess makes up the first part of a claim, so if your excess is £100 and your claim is for £500, you would pay the first £100 and the insurer the remaining £400. Many online insures let you set your own excess, but the lower the excess, the more expensive the premium will be.
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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.
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