A common mistake among novice investors is to buy into a stock that has taken a battering, in the belief that it will soon bounce back to its original price and so offer the chance of a quick profit.
Anyone who is thinking about buying into Rolls Royce for this reason after its share price fell 20 per cent on Thursday may wish to read Questor’s view below on why this may not be such a good idea…
Tuesday
Hiscox – Buy
Tempus tipped Hiscox on Tuesday, saying underwriters can be profitable investments when there is a lack of natural disasters. The surplus cash is typically returned to shareholders via special dividends, although matters look different this year with the company discussing better methods of deploying capital. Organic growth in recent years has been sound, generating some highly profitable business in niche areas and pursuing more work like this can only be a good thing. Despite the high rating, the long term prospects for the stock remain promising.
Dignity – Hold
Questor said investors should hang on to Dignity. The funeral operator is one of the country’s best-performing shares, well supported by a relatively consistent death rate, and a sharp increase in mortality last year owing to a worse than expected flu season over the winter has lifted profits further as a result. Steady revenues mean cheap financing costs for the company, which has an impressive track record of capital appreciation and long-term growth potential. It only caters for about one-quarter of the market and there’s still plenty of scope left for the acquisition of independent operators.
Wednesday
Vodafone – Buy
Questor tipped Vodafone as a “buy”. Shares surged 4 per cent on Tuesday off the back of news that growth had returned to the mobile operator after the disposal of its highly profitable stake in Verizon last year. The disposal was well timed – it handed cash back to shareholders and helped pay down debt when other operators were struggling. The investment in upgraded networks is paying off and although Vodafone has only half the number of 4G customers in the UK as the biggest player EE, it is catching up. This growth of 4G – and the heavy data requirement that comes with it – offers a good outlook. It currently yields 5.3 per cent and could still make for a bid target from a US group in search of European exposure.
Prudential – Buy
Buy Prudential, was the message from Tempus on Wednesday. The growing middle class in Asia has not only driven sales of savings and insurance products, but will continue to do so in the future as the firm becomes more focused on the region. That said, the UK and US sides of the business also look solid and with the company trading by some accounts at a 20 per cent discount to its actual value, even a sharp slowdown in Asia will leave the stock in a healthy position. The dividend is well covered too, so even with the advent of ever-tighter regulation, the long term prospects still look good.
Thursday
J Sainsbury – Buy
Tempus said J Sainsbury could be a good speculative bet. While things may not be great for the supermarket, things are hardly so bad as to warrant the pummelling the shares have taken recently. Nasty surprises in Wednesday’s earnings were thin on the ground, while with cost-cutting plans running £25m ahead of target, there was news to cheer, too. On the flipside, market share and margins continue to ebb away, while the ongoing IT project could see costs spiral. It’s fair to say that the pessimism is well priced in already, so with a dividend yield of 4 per cent and an 11 times multiple, this may be worth a look.
Brammer – Sell
Questor said investors should avoid Brammer, the industrial parts supplier. A profit warning – which was preceded by a hefty slide in the share price – has rattled confidence in the stock. This was the third such warning in 12 months and the company’s valuation has halved over this period. Cost-cutting plans are underway, but these come with a price tag too, and that slump in oil prices continues to weigh heavily on the company. There is nothing that looks terribly appealing here.
Friday
Rolls Royce – Sell
Questor said investors should sell out of Rolls Royce, claiming yesterday’s sell-off doesn’t make for a buying opportunity as the risk of a dividend cut still weighs heavily on the outlook. Slow jet engine orders and a struggling marine division – a result of the weak oil price – aren’t going to correct themselves quickly. Earnings per share are tipped to fall from 54p this year to 30p in 2016 and the risk is that the slide can’t be abated there. That said, there’s no concern over the long-term viability – this is a classic industrial downturn, the balance sheet is strong and debt remains manageable. But with that question mark over the dividend and the stock still trading at a multiple of 18 times, the column doesn’t like it.
IMI – Sell
Tempus recommended steering clear of IMI. The company is undergoing a restructuring programme that will see it launch a number of new products and should put it on course to double profits by 2019. However, exposure to a global market that is slowing and the comparative strength of the pound against the euro are acting as brakes on progress. The shares trade on 15 times earnings and in the long term should make for a safe bet, but right now upside potential is limited.
