Shares to buy, hold and sell: Charles Luke

9 January 2012

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."


"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."

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