It has been a woeful week for the FTSE 100, as falling commodity prices mean the index is on course for five consecutive days of losses. This seems to have caused a degree of uncertainty among stockpickers, with half this week’s share tips taken up by “hold” recommendations.
Tuesday
Scottish Investment Trust – Hold
On Tuesday, Tempus said investors should hang on to Scottish Investment Trust. The last set of results have done little to shake up the idea this is a pedestrian company, producing a total return of 3.7 per cent against a global market performance of 4.2 per cent. The year wasn’t without some significant coups for the firm, but these were offset by some bad calls – including taking a hit after it bet Zurich would buy RSA. However, the new(-ish) manager is starting to cast an impression on the firm, making some contrarian calls while also keeping a lid on costs. It is too early to say if this strategy will work, but the column is happy to wait – for now.
Aviva – Hold
Questor recommended holding on to Aviva. The insurer has performed steadily following its takeover of Friends Life, but there is nothing to suggest compelling value at the moment. Sales in the UK – even stripping out the effect of Friends Life – are up 13 per cent for the nine months to September. However, there are concerns new solvency requirements facing the insurance industry at the start of 2016 could prove damaging, which in turn is hobbling valuations – the shares trade on 11 times forecast earnings and yield 4.1 per cent. On top of this, the valuation is a 32 per cent premium to net asset value, but even with this backdrop, Questor isn’t getting excited.
Wednesday
Hornby – Speculative buy
Hornby is worth a small flutter, Tempus said on Wednesday. The company is in the middle of a transformational year and even though figures at the half-way point compare badly, the mood is upbeat – new systems are embedded and it is full steam ahead from here. Analysts and senior managers are unified in the positivity, but this remains a small company and investors shouldn’t make any emotional bets on it.
Victrex – Hold
Questor said investors should hold Victrex, which manufactures high-performance polymers. The company has already set out a plan to return surplus cash to shareholders, paying out a 50p per share bonus as soon as balances allow. It needs to keep around £40m on hand so it has the liquidity to pay for supplies, meaning whenever the bank account tops £82m, special dividends will be on the cards. Assuming one such payment each year, this means the stock yields an impressive 5.2 per cent. Sales are up, but margins are being squeezed a little, owing to a shift in the balance of where sales are being made.
Thursday
On The Beach – Sell
Tempus said investors should avoid On The Beach. The online travel agent posted impressive figures on Wednesday, sending the share price higher. The company’s popularity stems from its easy-to-use website and a million people booked over the site last year, apparently. Unfortunately, this comes at a price, with marketing spend up by 33 per cent. A maiden dividend of around 1.5 per cent is expected and the company trades at a modest 22 times earnings, but the uncertainty over online travel – and that rampant marketing spend to win customers – make this hard to justify in what is a turbulent industry.
Ashtead – Hold
Hang on to Ashtead, was the advice from Questor. Wednesday’s bumper set of interims sent the share price soaring almost 10 per cent, emphasising the fact that impressive Q1 numbers were no fluke. The business model means shares are highly sensitive to underlying trading, but so long as kit is being rented out, then overheads are covered and profits continue to roll in. The shares are now 22 times higher than they were in the depths of the financial crisis, so it is difficult to see just how much more upside there may be – especially given the risk of a slowdown in the US where fast growth has been recorded. Yes, there’s a 1.7 per cent prospective dividend yield and the chief executive has said this may improve if surplus cash allows, but the column said it is not worth chasing.
Performance of stock since financial crisis
Source: FE Analytics
Friday
Ocado – Sell
Questor said investors should sell Ocado. The company reported another year of rapid sales growth but profits remain thin on the ground. With a wafer-thin margin, EPS is forecast to be around 2p, meaning the shares trade on a 166 times multiple. As the column notes, that means there needs to be an 800 per cent increase in profits for the rating to become sensible – and there’s a bug threat looming with Amazon poised to move into this sector next year. Ocado is promising overseas expansion, but Questor is not convinced.
Centrica – Buy
Tempus awarded a “buy” recommendation to Centrica earlier this morning. The new chief executive who arrived at the start of the year has taken some tough decisions and this was reflected in yesterday’s trading update, which was awash with targets that had been achieved or even beaten. It’s not all plain sailing however – the company remains dogged by an IT issue and the CMA is set to shake up the market to make retail gas more competitive. However, with the shares trading on just a 12 times multiple and yielding 5.7 per cent, the stock looks well placed for growth. The column urges existing holders not to capitulate, instead suggesting this is a good time to top up.
