Cruise ship owner Carnival, telecoms giant Vodafone and drinks maker Diageo are three stocks that could be set for a rise this summer, according to The Share Centre investment research analyst Ian Forrest.
The phrase ‘sell in May and go away’ is an old adage that refers to the idea that the summer months typically have offered lower returns for investors and many stick by this.
While on average the returns have the potential to be lower than in the rest of the year, bottom-up stock pickers may still be able to find some gems that can provide superior gains in the usually slower months.
In this article, The Share Centre investment research analyst Ian Forrest highlights four stocks that could benefit from the summer months.
First up is drinks maker Diageo, best-known for brands such as Gordon’s gin, Captain Morgan rum and Johnnie Walker whiskey as well as Guinness and summer favourite Pimm’s.
“A good product mix combines with geographic diversification providing exposure to large, developed markets such as the US, as well as fast-growing emerging markets in Asia,” Forrest said.
The recent heatwave alongside the England football team’s success at the World Cup in Russia has given people plenty of excuse to have a drink and the analyst added that this combination of factors should increase demand for many of its brands.
“It also now has full control of USL in India, the most important emerging market, so prospects are certainly positive in several markets,” he added.
Performance of stock vs index over 10yrs
Source: FE Analytics
The company has been one of the biggest beneficiaries over the last decade as quantitative easing (QE) and extraordinarily low interest rates have forced bond investors into equities.
While still looking for lower-risk assets, these investors have placed a premium on defensive, dependable dividend payers such as Diageo.
However, despite the gains over the last decade, Forrest said there is still more to come from the beverage giant.
He said: “We continue to recommend Diageo because of the strength of its brands, resilient sales in the US market, excellent long-term prospects for emerging markets, continued improvements in cost-cutting and a reasonable dividend yield.”
Staying with the large-caps, another that could be worth a look this year is telecommunications titan Vodafone, which has seen its ‘share while there’ overseas phone package prove popular with customers.
“Offering 4G in some overseas holiday locations, the company may benefit as holidaymakers use their text and data to brag from the beach this summer,” Forrest said.
“Full-year results published in May reported a fall in revenue but profits rose by 15.4 per cent; the growth in data demand is a key driver for the business in the long term and opportunities abroad such as mergers and acquisitions in Germany, Eastern Europe and India should generate significant synergies.”
Unlike Diageo, Vodafone has not shot the lights out over the last decade and has performed broadly in-line with the market.
As such, the dividend yield, which has not been shrunk down by share price rises, should make this an attractive stock for income seekers willing to take on a low-to-medium level of risk, Forrest noted.
Performance of stocks vs index over 10yrs
Source: FE Analytics
Sticking with a similar theme, cruise organiser Carnival could be another to benefit from servicing Brits abroad, with cruises are one of the fastest growing parts of the leisure sector at the moment.
Carnival has around 100 ships and 212,000 berths, putting it in a strong position to benefit from this trend over the summer months.
The analyst said: “Its recent second quarter figures reported a 30 per cent increase in adjusted earnings and a 13 per cent rise in revenues to a record $4.4bn.
“Moreover, the group continues to enjoy sustained improvement in booking trends as it continues to expand to emerging markets like China and there is a good demand for cruises stopping in Cuba. We recommend the stock as a ‘buy’ for medium-risk investors.”
The final stock that Forrest said is FTSE 100 medical equipment company Smith & Nephew, which has been on a strong run in recent years.
Indeed, the stock is up 92.16 per cent over the past five years while the FTSE All Share index has gained just 48.25 per cent.
Performance of stock vs index over 5yrs
Source: FE Analytics
Forrest said: “Global orthopaedics Company Smith & Nephew develops, manufactures, markets, and sells medical devices in the sectors of advanced medical devices and advanced wound management.
“With the nation wrapped up in the football frenzy, we suspect that those that can’t bend it like Beckham may be in need of sports medicine.”
However, as well as sporting injuries, the group is also a beneficiary of the ageing society in the West and increasing numbers of middle class consumers in developing regions.
It has an attractive pipeline of new products and the group is set to benefit from investments in marketing and acquisitions, the Share Centre analyst added.
In its most recent trading update in May, the firm posted a 5 per cent increase in revenues, aided in particular by its growing emerging markets exposure despite softer market conditions in developed markets.
Additionally, there was weak performance of the Advanced Wound Bioactives products due to deepening seasonality patterns and distributor stocking activities.
However, over the longer term, drivers remain in place and the company has continued to show good underlying performances, Forrest said, adding that the stock is recommended as a ‘buy’ for medium-risk investors seeking capital growth.