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Is there light at the end of the tunnel for shares?

Share prices are battered, but the earnings of some companies are holding up leading analysts to spot buying opportunities.

 
Is there light at the end of the tunnel for shares?

Share prices have been battered but the earnings of some companies have held up, leading analysts to spy potential buying opportunities in the event that markets settle.

Shore bets

Shore Capital has highlighted a bevy of stocks that have underperformed the wider London market and yet have seen analysts upgrade their estimated earnings.

Among the stocks are engineer Cookson Group (CKSN.L), which has seen its earnings forecasts hiked but has underperformed the FTSE All Share index by 25% in the past year; and pork supplier Cranswick (CWK.L), which has also only seen upgrades yet has underperformed the market by 11% in the past three months.

Despite the market having been ‘marked down’, said Gerard Lane, analyst at Shore, ‘the analysts are taking a positive view of the earnings’. He added: ‘They’ve been de-rated – more than the market – so in that sense, a number of them would be opportunities to pick up.’

Lane pointed to Kingfisher (KGF.L) as another stock that had seen a majority of forecast upgrades – although it has, in fact, beaten the FTSE All Share of late – noting that the B&Q-owner impressed investors on Thursday with strong earnings.

‘People have become very defensive in their stock selection, understandably, but the opportunity lies within cyclicality as well, where analysts [on] companies have the confidence going forward,’ he continued, referring to stocks subject to the vagaries of the business cycle.

Near the bottom

Indeed, Darren Winder, analyst at Oriel Securities, noted that while UK economic growth would probably slow to about 1% this year, consumption was likely to strengthen during 2012 and into 2013. This would happen, he said, due to the ‘cash-flow effects’ associated with lower mortgage payments, increased tax allowances and other factors such as easing energy prices.

‘In anticipation of what we expect to be a steadily improving economic outlook, both in the UK and elsewhere, we expect valuations in domestic consumer cyclical sectors to return to levels more in line with underlying levels of profitability,’ he said in a research note.

Of course, markets still face considerable headwinds in the shape of Europe’s mounting debt crisis and a slowing global economy, both of which could trigger a rash of earnings downgrades as well as precipitate even steeper share price falls.

RBS spots a corner

Analysts at Royal Bank of Scotland have identified ‘tentative signs’ of cyclical growth stocks starting to turn a corner in European equities, pointing to recent price action in the following sectors: semi-conductors, miners, staffers and capital goods. And these early-cycle ‘baskets’ could provide useful leading indicators for the wider market, they wrote in a report.

They look to further stimulus measures from central banks – as part of efforts to prevent their economies from falling back into recession – as a potential catalyst for a lurch upwards. ‘Another round of monetary easing, perhaps as soon as next week, could drive a re-appraisal of these early-cyclicals and the wider market’, they said.

Among the early-cycle stocks they cite, and for which RBS has ‘buy’ ratings, are: chip designer ARM Holdings (ARM.L); recruitment firm Hays (HAYS.L); engineer Bodycote (BOY.L); and miner Anglo American (AAL.L).

9 comments so far. Why not have your say?

Jonathan

Sep 16, 2011 at 16:59

Yes, as money devalues shares go up. I'm not sure it's good news unless you compare the prices to real inflation. The Central Banks have all agreed to create a load more money. This obviously causes long term inflation and shares should inflate along side the creation of money. Possible inflating faster than the rest of inflation, maybe even inflating in anticipation of the new money being created. There is a well know delay in money creation and inflation and a well know inflation in share prices in anticipation of money creation.

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Dislexic Landlord

Sep 16, 2011 at 17:15

life is funny what a strange title

Light at the end of the Tunnel

Today we should be thinking about the welsh Miners who have perished today

God Bless them

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Tony Peterson

Sep 16, 2011 at 17:31

There wasn't any tunnel to have light at the end of.

In late July there was a concerted attempt by financial "professionals" in collusion with media cronies, to talk down the market by claiming that 1929 was about to happen again. There was a large amount of support from institutions short selling shares in many major companies, driving share prices down, yet which, surprise surprise, the directors of the very same companies found it (by a ratio of 30:1) a wonderful opportunity to add to their holdings.

Were you persuaded to sell in the first week of August? I think you should complain to the FSA.

Anyway, thanks for the cheap shares I picked up at the bottom of the spike.

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Mark22

Sep 16, 2011 at 18:42

Feels like "lets start another rumour, maybe we can get some more transactions to make money out of". How much money has been made recently from the transactions and how does that compare with the money made by the people buying and selling.

Californian Gold Rush - the prospectors in general didn't make much but the people who sold the shovels made their fortunes

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Chris Hayes

Sep 16, 2011 at 20:07

RBS investment analysts recommend Hays Recruitment.....(insert inevitable snide/ironic comments here...roll up! roll up!)

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Anthony O' Grady

Sep 16, 2011 at 22:09

Mmmm recommendations from Royal Bankrupt of Scotland and a bloke called Darren.

Time to re-visit the Elliot wave theory. Much more downside to come in equity markets, particularly after the Euro, in it's current guise, disintegrates. Remember markets always over or underperform at the margins.

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Barry1936

Sep 17, 2011 at 10:48

I wish equity pricing was that simple - it isn't just about earnings. One thing I am sure after years of investing is that the market usually gets it about right and is always ahead of the private investor! If Cookson, Cranswick and Kingfisher share prices are underperforming, in spite of earnings growth, then the market knows something I haven't discovered yet.

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James Park

Sep 18, 2011 at 08:41

I like the comment about lower mortgage payments and easing energy prices. There's only one way mortgages will go in the short to medium term and as for energy prices , I'll leave your readers to judge on that one.

What about all the millions of workers who havn't had a pay rise for some time?

Do these so called analysts live in the real world?

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Colin Edy

Sep 19, 2011 at 10:25

James Park is perfectly correct and most analysts have no idea of markets.Having worked in the City for almost 50 years, mainly in banks and stockbrokers, before retiring I found very few analysts knew what they were talking about. How many times do you see them revising a share price when their original forecast proves to be totally wrong. Even then they will revise the price to where the current market price is in the market which does not take much intelligence. Analysts together with economists are the most over paid people in the City and both are wrong more times than not.

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Look up the shares

  • Cookson Group PLC
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  • Cranswick PLC
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  • Kingfisher PLC
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  • ARM Holdings PLC
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  • Hays PLC
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  • Bodycote PLC
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  • Anglo American PLC
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