With the FTSE closing in on its highest level in 2016, more investors may be tempted to take the plunge now that the worst appears to be over. However, this week’s share-tip roundup from Trustnet Direct contains just one “buy” recommendation – for food manufacturer and supplier Greencore – compared with four “sell” notes.
Tuesday
Fever-Tree – Hold
Questor recommended hanging on to Fever-Tree on Tuesday, pointing out that while sales are roaring ahead, the share price risks becoming overinflated. Sales were up 71 per cent in the year to December, revenues were £4.5m ahead of expectations and the full year numbers due in a couple of months are expected to be just as impressive. However, the growth trajectory cannot continue and with the shares currently trading on around 40 times earnings – more than double that of the company’s peers – the good news is evidently priced in. It has been a phenomenal first year of trading for the stock, but now is not the time to get on board.
Performance of stock since IPO
Source: FE Analytics
Kingfisher – Sell
Sell Kingfisher, was the message from Tempus. Shares in the retailer took something of a beating on Monday as it announced plans for a makeover in an attempt to unify various parts of the business and improve profitability. However, the column pointed out policies such as centralised buying probably should have been tried some time ago. The trading update at Monday’s presentation was evidently limited and fairly downbeat, adding to the gloom, and the upbeat aspirations of Homebase’s new owner mean the playing field isn’t going to get any easier.
Wednesday
Greencore – Buy
Tempus said investors should buy Greencore for the long term. The company sells pre-made sandwiches and other food-to-go items to retailers – including Marks & Spencer and the Co-op – and is posting some impressive growth figures right now. Falling food prices are helping offset the imminent minimum wage increases, but the column noted the US business has recently been in a state of flux. However, there are hopes a brighter future lies ahead here, which would help justify the current 18 times rating for the stock.
PZ Cussons – Sell
Sell PZ Cussons, was the recommendation from Questor on Wednesday. Shares in the consumer products company took a beating on Tuesday as it became the latest firm to feel the heat of the oil crisis as sales in Africa languished. However, the column doesn’t see a buying opportunity at these levels, as debt has spiralled in the wake of some notable acquisitions in Australia. The company is keen to stress it doesn’t overpay for brands, but even so, the recent depreciation of the Australian dollar is another concern when it comes to valuations. There is also concern over the illiquid nature of the shares, given the founding family holds 35 per cent, so the column suggests leaving well alone until there is evidence of a turnaround.
Thursday
Avon Rubber – Hold
Questor said investors should hang on to Avon Rubber, which makes gas masks for the military and suction systems for milking cows. Shares fell 17 per cent on Wednesday as it cautioned that tough market conditions lie ahead for the next quarter, although the longer term position was rather better. As sole provider to the US military, the company certainly has some solid cashflow coming through, while additional sporadic orders from the Middle East provide the ability to shift some goods at a healthy margin. After last year’s run-up, the shares had probably become a little too expensive, but after this shake-out, they now trade on 17 times earnings – the column thinks long term value lies in wait.
Royal Bank of Scotland – Sell
Avoid Royal Bank of Scotland, said Tempus on Thursday. With more write-downs included in Wednesday’s news, it seems as if this saga of "unknown unknowns" still has some distance left to run. Despite suggestions that we may be nearing the end of this chapter of fines, the column pointed out there is still a string of unresolved legal matters hanging over the bank. The core tier one capital ratio is enviable and the low share price may draw some investors in for a speculative punt, but it’s still a bit too soon to believe this is the end of the share price’s downside.
Friday
Diageo – Hold/sell
There were mixed opinions on Diageo this morning. Tempus recommended selling out – halfway figures for the brewing giant weren’t great, with the ongoing corruption clampdown in China and a general slowdown in emerging markets weighing on the stock. There are hopes the US operation can be turned around, but again this requires a fundamental shift – cutting prices of what used to be considered premium brands and moderating the launch of new products. Shares have recovered well from last August and now trade on a 21 times multiple, so the good news is already priced in.
Questor was slightly more optimistic, recommending investors hang on to the stock. The column appreciated yesterday’s modest sales rise, even though the emerging market slowdown is certainly giving cause for concern. Conditions in Europe are also seen as tough, although the US is managing to offset falling vodka sales with strong whisky and bourbon revenues. The column also highlighted the adverse impact of foreign currency swings – sales in Venezuela were up 7 per cent, but the currency has slumped by 50 per cent against the US dollar. The conclusion is this is fine to hold for income, but nothing to get that excited about.
