For anyone brave enough to invest directly in stocks, the analysts at wealth manager Brewin Dolphin have revealed which ones they expect to beat the market over the next 12 months.
Direct Line
Equity analyst Nik Stanojevic (pictured) says income investors should look to Direct Line, which could deliver a stonking headline yield next year from dividend growth of 40 per cent in the pipeline.
“Direct Line could yield 8.9 per cent in 2015 as it cuts costs and can afford to pay out more of its earnings due to its strong and improving capital position,” he said.
Shares in the insurer have appreciated 27.77 per cent since flotation in October 2012, according to data from FE Analytics.
Performance of stock vs index since flotation
Source: FE Analytics
Stanojevic thinks the company is set up for continued growth.
“Management incentives are aligned with large share options vesting if it hits its targets,” he said.
Intercontinental Hotels Group
Brewin Dolphin also tips Intercontinental Hotels Group to continue its recent strong run. The stock has made 83.59 per cent over three years while the FTSE All Share has made a more modest 26.72 per cent.
Performance of stock vs index over 3yrs
Source: FE Analytics
“We believe the long-term growth story remains very much intact,” said analyst Ed Salvesen.
“There have been a few disappointments in recent results, but we would argue that this is a long-term positive as it shows that management has been willing to forgo growth to protect the brands, which are the most important element of the investment case.”
“IHG has a 6 per cent market share and a 15 per cent share of the global pipeline of rooms, so we believe that it is reasonable to believe that it can continue to gain market share.”
“It is already the largest hotel chain in China and has an impressive pipeline of hotels in Tier 1, 2 and 3 cities.”
“We continue to like its long-term fundamentals, with an impressive exposure to both the US and China.”
Prudential
Another stock the wealth manager likes for emerging markets growth is insurance group Prudential.
“Life insurance can be a dull sector but we believe that Prudential’s significant exposure to a rapidly growing middle class in Asia makes it one of the best placed insurers globally,” said Ruairidh Finlayson, assistant director and equity analyst.
Next
Closer to home, the analysts are tipping retailer Next, which returned 48.75 per cent in 2013 to the market’s 16.15 per cent.
Performance of stock vs index in 2013
Source: FE Analytics
“2014 should be another good year for Next,” said analyst Nicla Di Palma. “Growth in retail stores remains subdued, but directory [mail order] sales continue to boom.”
“Homeware should drive sales growth in the year to come and the strong free cash-flow generation is likely to mean further buybacks in 2014.”
Telecity
This company provides data centres to mobile phone networks. It has underperformed of late due to UK growth worries and poor interim results.
However, Finlayson says that it can turn this around with the appointment of a “FTSE 100 quality” finance director and an improvement in its markets, driven by the ever increasing need for connectivity in key internet airports.
G4S
G4S has been the bad boy of the FTSE ever since it failed to fulfil its contractual obligations at the Olympics.
Further scandals since then have tarnished its reputation and led to the departure of senior management.
Analyst Iain Armstrong thinks the company is set for better times next year thanks to new management and a new approach, led by a forensic examination of all contract performance, an increased focus on organic revenue growth and sustainable free cash-flow.
Hammerson
Bargain-hunters should look at property developer Hammerson, which owns a number of shopping malls in its portfolio, according to analyst Stephen Williams.
It has been a tough year for the company as the retail sector has struggled, but Williams says this is set to change.
Performance of stock vs index in 2013
Source: FE Analytics
“Shares can be bought on a 12 per cent discount to forecast net asset value and offer a dividend yield of 3.8 per cent,” he said. “This looks a bargain in a January sale.”
“Shopping is moving forward as the malls aim to become venues for a whole family day out, with eating, entertainment and free parking some of the additional attractions now being offered. Thus, we believe that retail is not dead.”
“After all, retail rental values are now beginning to increase after 25 months of falling.”
“Hammerson has some significant developments in hand at Croydon, Leeds and Brent Cross, all of which are due to start in 2014.”
“Add in its interest in the hugely successful European Retail Villages (which include the Bicester designer outlet) and new large shopping malls in Paris and Marseilles in France, and the story gets rather interesting.”
BG Group
Armstrong also picks energy company BG Group, which he says is due to return to positive free cash-flow in 2015 due to more than tripling production in Brazil and the completion of the Queensland coal-to-LNG project.
Drax
Another energy-related stock that Brewin Dolphin likes is Drax, which owns the largest coal-fired power station in Europe, but is shifting into more environmentally friendly fuels.
“As Drax shifts from coal to biomass, it will benefit from rising power prices and the Government’s renewable subsidies; we expect double-digit earnings and dividend growth in 2014,” said Elaine Coverley, head of equity research.
“Ironically, Drax was one the UK’s largest carbon emitters but after refitting its generators will become one of the UK’s largest renewable generators.”
