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David Kempton: a six-pack of stocks for 2016

David Kempton is getting his 2016 predictions in early, tipping stocks to benefit from cyber security and demand for property.

 
David Kempton: a six-pack of stocks for 2016

My time working as an engineer in Saudi Arabia in the 1980s has left me with a strong interest in all matters Middle Eastern, and many old connections.

This has strangely placed me in some demand to lecture on Islamic State to various groups. I always begin by outlining what I believe are the four major risks to our comfortable Western way of life:

  • viruses, pandemics or diseases untreatable with antibiotics;
  • cyber attacks;
  • dirty nuclear, biological or chemical aggression;
  • Islamic fundamentalism.

Our first line of defence is the highly respected Government Communications Headquarters (GCHQ), now employing 8,000 people monitoring communications all over the world in hundreds of different languages. 

Terrorists don’t use the obvious conventional social media any more, but WhatsApp (encrypted), Snapchat (‘super secret, self destructing’) and SwiftKey. The Paris terrorists apparently used Xbox games consoles to communicate.

Against this backdrop every company in the world should plan for what GCHQ describes as almost ‘unlimited’ future spending on cyber security. $82 billion (£55 billion) was spent last year, rising to $100 billion in 2017 with JPMorgan and Bank of America apparently spending about $500 million each.

Cyber defence stocks

UK quoted companies to benefit include NCC (NCCG) and Sophos (SOPH), both with market caps of around £1 billion, sitting in exactly the right space. 

I’ve bought NCC, who raised £126 million in November to buy Dutch peer Fox-IT, which should significantly impact projected growth, and is forecast to increase profits 66% in 2016, which seems a modest projection to me. Sophos looks expensive now and private equity group Apax has just sold down its stake, but it’s worth watching.

Another potential investment impact of these risks to the Western world is on the oil price.

Saudi Arabia, probably now producing 12% of the world’s oil, is becoming increasingly politically insecure with growing dissention against the ruling regime and its policies, whilst locking horns with Iran in Yemen, who arm and finance the Shia Houthi rebels and the Alawite (Shia) regime in Syria.

There is deep routed hatred here between the Sunni Saudis and the Shia Iranians, which could yet escalate threateningly.

Nobody knows if oil will be nearer $20 or $60 by 2017, but I’m in the camp that believes it will trend lower yet, then rise to near the $60 level.

Oil explorer buys

Irrespective I have retained only two oil companies, both of which I would rate strong buys. They are both low cost producers, essential currently.

I went to the Pantheon Resources (PANR) annual general meeting this week and was impressed by the massive potential of the two wells so far discovered where the geology points to a very significant find. 

Potentially it could become the largest onshore US conventional find this century, with very low operating expenses, so it can be profitable at a low oil price.

This is not yet proven, but should develop well through next year as drilling news comes through. The price has moved a long way this year and is now a big holding, but institutions may have to start buying soon and the share has much further to run on current exploration evidence.

This is a classic example of owning more than one exploration company. I owned six in January, four have gone no where, so I’ve sold them with minor losses, while Pantheon has made me eight times my money, so far. I have sold enough to cover my initial stake and will run profits now at no cost, whilst moving up my usual 20% stop loss.

I’ve also bought more Amerisur (AMER), which looks over sold now, but with their new pipeline due to receive final permit and capacity of 70,000 barrels per day, will save the company $18 per barrel in costs.

That will transform the Paraguay and Colombia-based company into a very cheap producer of high-grade oil in a stable political environment.

The price is cheap now since long delays in the pipeline permits have damaged credibility and created a buying opportunity.

Bullish despite risks

I am modestly bullish on the market generally, at least for the first three months of 2016, in spite of the Middle East issues which could swipe us at any moment, but there are other risks ahead.

Domestically UK growth slackened last month, business confidence and manufacturing output are declining, while US interest rates are rising, although only ‘gradually’ (an important word from the Fed).

It feels uncomfortable for UK rates starting to trend upwards, whilst the European Central Bank props up its faltering economy by printing money; currently 30% of European government bonds have negative yields.  

A potential UK exit from the European Union also looms, with prime minister David Cameron is likely to bring the referendum forward to the autumn of next year.

Although recent UK trade balances are notably bad, especially with Europe, which still accounts for 40% of exports, we import hugely more from them in volume terms, suggesting they may need us more than we them.

I’ve bought more MJ Gleeson (GLEG) and Inland Homes (INLD), both well up on when first mentioned here, but still looking good value amongst the house builders, as the government’s supportive policies stimulate demand in a market of chronic shortage.

I have also bought more shares in equipment rental company Ashtead (AHT), where trading seems to be going really well, with US branches at a rate of more than one a week. The price has been held back by poor results from United Rentals (URI.N) in the US and issues with HSS Hire (HSS) and Speedy Hire (SDY) in the UK, which I took as a buying opportunity to get some more.  

We enter the festive season when every journalist and pundit seems to give their views for the year, so I’m striking early with my own picks for 2016 – all long-term holds and not for short-term trading.

David Kempton is an experienced investor, proprietor of Kempton Holdings and a non-executive director of a number of quoted and private companies. He may have an interest in any of the investments which he writes about.

9 comments so far. Why not have your say?

Bevan Bollie

Dec 18, 2015 at 15:52

I know you were previously a holder of ROSE petroleum. any ideas what has caused the share price to fall so signficantly? Do you have any views on the stock?

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CUEBALL

Dec 18, 2015 at 17:04

Gleeson...not repeating myself...inland ....still can't believe last months 'giveaway'

Ashtead looks back in an uptrend....applause...Kempo

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CUEBALL

Dec 18, 2015 at 17:17

Is that first comment a wind-up?...sorry no offence ...just curious

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Graham D-C

Dec 19, 2015 at 10:08

OPG share price has been seriously held back by long delays caused by India's state owned power line construction company. However, In January 2016, the last of OPG newly built coal fired150MW plants will be connected to the power grid, bringing total capacity to 750MW in the current FY.(270MW -2015). A maiden 0.5p this year, will be topped with a circa 40% and 45% rise in Eps this year and next respectively. India's history of an ever Increasing demand for electricity, shows no signs of change, with the government pledging to bring power to 18,000 villages by 2019. DYOR

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david kempton

Dec 20, 2015 at 17:41

to Bevan Bollie

I'm afraid Rose Petroleum is a victim of the oil price and uneconomical fracking.

Most of the US frackers who had spent their capex are still happily producing since the actual cost of extraction, once the well is set up, makes it commercial sense, especially as they get increasingly efficient in their techniques.

Rose was not in that position, but it is a powerful determined Board with lots of firepower and historically unaccustomed to failure. I suggest you read their recent announcements which are reasonably encouraging. If still held, I would have thought, worth hanging in.

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CUEBALL

Dec 30, 2015 at 17:50

That must have been a nice present Mills'y bought on Christmas Eve after selling 19500 glee...well deserved ...and...thanks Chris x

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stisted

Jan 02, 2016 at 15:09

Gleeson and Inland have been well recommended by others - but am a tad concerned to see that the top guys at both coys have been cashing in during the past year - and well into December. Over £10m in the case of GLE !

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CUEBALL

Jan 04, 2016 at 20:23

Hi... have a look at Chris Mills Harwood capital NAS and ORYX The sells are pocket money compared to holding

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CUEBALL

Jan 04, 2016 at 20:23

Hi... have a look at Chris Mills Harwood capital NAS and ORYX The sells are pocket money compared to holding

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