View the article online at http://citywire.co.uk/money/article/a524718
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.
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 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).
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In this guide to investment trusts, produced in association with Aberdeen Asset Management, we spoke to many of the leading experts in the field to find out more.
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Look up the shares
- Cookson Group PLC
- Cranswick PLC
- Kingfisher PLC
- ARM Holdings PLC
- Hays PLC
- Bodycote PLC
- Anglo American PLC
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