Although stocks such as easyJet, Pearson and Bayer have performed in a rather lacklustre fashion recently, investors at GAM think 2016 might just bring about a turnaround in their fortunes.
As investors start to think about their positioning for the coming 12 months, we take a closer look at five ‘underdogs’ that they think could bounce back next year.
easyJet
Gianmarco Mondani, an investment director in GAM’s non-directional equity team, highlights this British low-cost airline as his pick, pointing out that its share price has been hit by persistent slide in the price of oil.
Performance of stock vs index over 2015
Source: FE Analytics
“The stock has underperformed the market on fear that low oil prices and growing capacity will mean greater competition and erode its margins,” Mondani said.
“It trades relatively cheaply on 10 times forward earnings and has solid margins, strong balance sheet and plenty of opportunity (like Ryanair) to gain more market share and beat consensus expectations.”
Last month the airline reported a fifth consecutive year of record profits, after announcing an 18.1 per cent jump in pre-tax profits for the year to the end of September. The group made £686m over the period in question after passenger numbers rose 6 per cent to 68.6m.
Carolyn McCall, easyJet chief executive, said at the time: “Our outlook for the longer term is positive. We expect demand in our markets to be sustained and for easyJet to continue to be a winner in its markets. We will see passenger growth of 7 per cent a year, sustaining margins through rigorous cost control and the benefit of fleet up-gauging, resulting in positive profit momentum.”
Intel
This noted semiconductor chip maker is the pick of GAM technology strategies investment director Mark Hawtin, who thinks the tech giant could continue to rebound for its fall of the past year. Between the start of the year and 25 August, Intel’s shares dropped almost 30 per cent after investors braced for slower computer sales.
However, it has been climbing steadily since then after its second-quarter earnings came in better than expected and reported that its data centre business was still seeing double-digit growth. It did experience another dip, though, when its third-quarter results in October showed it missed some expectations, despite a big jump in profits.
Hawtin said: “We think 2016 is a good time to look at Intel again. The company has suffered in the past with the ‘leaky bucket’ of declining PC sales, however, there are signs that this will slow in 2016 or may even flatten out. One of the core themes of its recent analyst day was that growth in the data centre group (cloud) and internet of things/mobility business will compensate for the slowing PC business.”
“With relatively cheap valuation levels (14x) and a dividend yield of almost 3 per cent, it is easy to see how Intel, like Microsoft, can become part of the basket of investments to hold for the developing cloud story.”
Pearson
John Lambert, investment manager for global and UK equity strategies at GAM, opts for this UK publishing and education company, which hit the headlines recently after its share price slid following a profit warning. The fall means it’s now down 33 per cent over 2015 far, despite being up more than 25 per cent by mid-March.
Performance of stock vs index over 2015
Source: FE Analytics
“While this was disappointing, we believe there is still a strong case to be made that Pearson is a global leader in education technology, and that recent poor performance can and will be rectified,” Lambert said.
“The role of technology in education will continue to rise, and so long as educational outcomes in many developed markets remain below expectations (notably the US), then demand for Pearson’s core offering should remain structurally intact.”
“With further investment and some strategic repositioning, the company can begin to grow again and as a result regain a higher valuation multiple. Recent disposals have been very timely in this regard, with the company selling the FT Group and also its stake in the Economist and, on a proforma basis, thus eliminating most of its net debt. The stock looks particularly cheap in comparison with its own history, and expectations remain very low. To contrarian value investors, the stock looks very interesting at these levels.”
Bayer
Oliver Maslowski, portfolio manager in European equities, said this German chemical and pharmaceutical company is his high conviction stock for 2016.
“The company underperformed the DAX and its peer group year-to-date as investors remain sceptical regarding the potential of its pharmaceutical product sales and its crop protection exposure, given the slump in commodity prices and its difficult chemicals division IPO (Covestro),” he said.
“Strong third-quarter results, solid earnings growth, a 10 per cent valuation discount to EU pharma peers and modest market expectations are a good setting for potential outperformance in 2016.”
The most recent results from Bayer reported a 10.7 per cent increase in group sales to €11bn while profit before interest and tax was €1.6bn, up 16.3 per cent year-on-year.
SMC
Ernst Glanzmann, investment manager and head of Japan at GAM, says this firm – which manufactures pneumatic equipment and actuators used for factory automation – could rally after a weak 2015.
“The share price has underperformed in 2015 due to concerns over China and a slowdown in smartphone production/sales in 2015,” he explained.
“However, 65 per cent of SMC’s total sales are in developed countries, where the company has a steadily growing market share. In addition, the slowdown in China seems to be priced in to the share price, and the price should react on positive news, such as industry consolidation and more capacity reduction led by the government.”
The firm currently has a 33 per cent market share in the pneumatic automation field but analysts at Credit Suisse say this could rise to 40 per cent in the next seven years if rising global labour costs, manpower shortages in manufacturing and an ageing population result in an expected jump in companies moving towards automation.