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The latest winners and losers in Citywire Top Stocks
Six new companies break into Citywire Top Stocks this month, while seven stocks have left the core holdings of the fund managers we track.
by Harry Brooks on Sep 18, 2012 at 12:40
This month's changes
The figures are in so we're ready to take a look at what's changed this month in Citywire Top Stocks®, our complilation of the top 10 holdings of five leading UK fund managers, whose funds feature in Citywire Selection’s list of investment recommendations.
Note that the changes in Top Stocks are based on new data of the funds' top 10s at the end of July, not this month.
The new entrants are Barclays (BARC.L), Melrose (NYN.L), Rotork (ROR.L), Vedanta Resources (VED.L), Virgin Media (VMED.L) and Xstrata (XTA.L).
Bowing out, meanwhile, are Carnival (CCL.L), Drax Group (DRX.L), Galliford Try (GFRD.L), Kenmare Resources (JEV.L), Lupus Capital (LUP.L), Pearson (PSON.L) and Reed Elsevier (REL.L).
Looking at our fund managers' portfolios as a whole, the biggest overweights are to industrials (11.6%) and technology (5.6%). The biggest underweights are financials (-4%), consumer goods (-4.3%) and utilities (-2.1%).
As well as identifying which of our top managers have bought or sold the shares, we've included forward price-to-earnings (P/E) figures for each stock.
Scandal-hit Barclays makes it into Top Stocks this month after Edward Legget took advantage of the Libor rate fixing scandal and ongoing eurozone fears to buy more shares in the bank in July, which he has held in his Standard Life Inv UK Equity Unconstrained fund for some time.
In June the bank was fined £290 million by the US Department of Justice for manipulating the Libor rate, which is the rate at which banks will lend to one another. Amid intense public and political pressure chief executive Bob Diamond stepped down, to be replaced by Anthony Jenkins.
The shares crashed about 20% immediately after the scandal broke, but within a month they were on the way back up, and they're now around 15% higher than they were before the scandal. Richard Buxton, another of our Top Stocks managers, added to his position in Barclays after Diamond resigned, although it is not currently in the top 10 of his Schroder UK Alpha Plus fund.
Earlier this month Jason Napier, analyst at Deutsche Bank, upgraded Barclays from 'hold' to 'buy': 'Restoring Barclays’ reputation with the investors and regulators will take time. But the new CEO and chairman [David Walker] are well positioned to do so,' he said.
The shares trade on a P/E multiple of 6.7 times forecast earnings for next year, versus a sector average of 10.5, according to Reuters data.
Melrose, the industrial turnround specialist, soars into Top Stocks as a result of its $2.7 billion (£1.6 billion) acquisition in July of Elster, a US-listed German maker of electricity, gas and water meters.
The company has been a long-standing holding of Derek Stuart's Artemis UK Special Situations fund.
Stuart says: 'Over the years the management at Melrose have increased shareholder value through the improvement of acquired businesses McKecknie and FKI. We see no reason why they cannot achieve the same success with Elster... While we expect the usual cost efficiencies to be extracted from the business, there is also an attractive revenue opportunity with the significant move to gas production and usage in the US and the introduction of smart metering.'
Melrose is now one of Stuart's largest holdings after he bought more shares in the two-for-one rights issue the company launched to fund the Elster deal. The arrival of lots of new shares explains the sudden plunge in the share price in our chart, and does not indicate a problem with the company.
The acquisition more than doubled the group's revenues and propelled it into the FTSE 100 this month. The shares trade on a P/E multiple of 16.1 times forecast earnings for next year, versus a sector mean average of 10.9, according to Reuters data.
Rotork makes valves and other control systems for the oil, gas and water industries, like Weir (WEIR.L), one of Thomas' other biggest holdings. The shares have climbed around 15% in the past three months and this rerating led Thomas Rands, analyst at Peel Hunt, to downgrade the stock from 'buy' to 'hold' at the end of August. They first entered Top Stocks in May.
Record first-half revenues and profits clearly demonstrated why the business should trade at a premium to the sector, the analyst said. However, with the company now trading above his target price of £22 he decided to pull back his recommendation.
He also trimmed his estimates as the group's controls division is launching some new products, which means more investment in staff and tooling.
The shares trade on a P/E multiple of 20.7 times forecast earnings for next year, versus a sector mean average of 11.6, according to Reuters data.
Diversified metals and mining company Vedanta Resources claims a place in Top Stocks this month after Edward Legget exploited a fall in its share price to top up his holding in his Standard Life Inv UK Equity Unconstrained fund.
The shares hit a high this year of £15.02 at the end of February, but have since slipped to nearer the £10 mark.
One concern for shareholders is the group's 55% stake in Indian mining company Sesa Goa, which saw its operations suspended as part of an inquiry into illegal prospecting in Goa. According to Merrill Lynch if the suspension cannot be resolved, it will reduce Vedanta’s earnings 7% and 9% in 2013 and 2014 respectively.
The ban revived wider fears about the company's balance sheet, with the planned merger of subsidiaries Sesa Goa and Sterlite, which would simplify its corporate structure, running behind schedule.
The shares trade on a P/E multiple of 7.2 times forecast earnings for next year, versus a sector mean average of 8.6, according to Reuters data.
Entertainment and communications giant Virgin Media dropped out of Top Stocks in January but returns this month after a revival in the share price put it back in the top 10 of Richard Buxton's Schroder UK Alpha Plus fund.
The company competes with BT and BSkyB to provide broadband, telephony and pay-TV. Its shares have a secondary listing on the London Stock Exchange, with the main listing being the US Nasdaq. The UK-listed shares have performed strongly since the start of the year, climbing almost 15%.
The group's second-quarter results hit expectations, with revenues up 4.2% year-on-year to £1.03 billion and earnings before interest, taxes, depreciation and amortisation up 5.1% to £412 million.
Peel Hunt analyst Patrick Yau reiterated his 'buy' recommendation following the publication of the results, saying the company was making progress in reducing customer churn.
'Overall we see these numbers as solid, as the company continues to buy back its stock in the market, with the next stage to repurchase £113 million of shares being initiated now. We are maintaining our forecasts for now and the shares remain inexpensive in our view,' he said.
The shares trade on a P/E multiple of 14.2 times forecast earnings for next year, according to Peel Hunt.
The group is the target of a £36 billion offer from Swiss commodities trading giant Glencore, which is currently offering 3.05 of its shares for each Xstrata share. The key to the deal getting the go-ahead is consent from Qatar Holding, which has a 12% stake in Xstrata. The Middle Eastern group previously said it was holding out for 3.2 Glencore shares for each Xstrata share.
Writing last week Charles Stanley analysts noted that the 3.05 deal includes adjustments in Glencore’s favour in return for the higher offer.
'Our sense, although this may be over-interpretation, is that some or all of the Xstrata board overplayed their hand and insisted on various terms in the original recommended offerin return for “delivering” the Xstrata shareholder vote. They failed to do so, and Glencore therefore feels free to go back in the direction of what it might have preferredin the first place,' they said.
Xstrata's decision is due on Monday.
The shares trade on a P/E multiple of 12.9 times forecast earnings for next year, versus a sector mean average of five, according to Reuters data.
Shares in the company tumbled 18% at the beginning of the year when the Costa Concordia, owned by a subsidiary of Carnival, ran aground off the coast of the Italian island of Isola del Giglio.
The shipwreck killed 32 people and the group announced it expected to lose $95 million (£62 million) in 2012 earnings as a result. However, the shares have since recovered the lost ground.
Writing on Friday Simon Champion, analyst at Deutsche Bank, reiterated his 'buy' recommendation on the shares.
His target price, however, was cut from £24.50 to £24 as a result of the rising oil price. 'Today, we have raised our 2013 oil price assumption from $620 to $710,' he said. 'This results in a 2.2% reduction in our 2013 earning per share forecast from 243 cents to 238 cents (consensus 250 cents).'
The shares trade on a punchy P/E multiple of 19 times forecast earnings for next year, according to Reuters data.
Drax Group bows out this month, having also previously featured in the top 10 of Richard Buxton's Schroder UK Alpha Plus fund. However, it may well return as Buxton recently told us in a video interview that had had added to his position.
The group owns the Drax Power Station, a coal-fired plant in North Yorkshire, which generates about 7% of the UK’s power. Plans are underway to build a biomass power station at the site and develop further plants in Hull and Immingham.
Writing after the publication of interim results in August Angelos Anastasiou of Investec said the solid figures, which came in ahead of expectations, were overshadowed by changes to its biomass plans.
Changes to government policy mean that Drax now plans to convert three of its six generating units to be biomass-fuelled, rather than co-firing biomass and coal in all of its units.
'The overall capex scale remains at about £650-700 million, but the plans may well be challenging to achieve. We still believe that there are significant risks here,' Anastasiou said, reiterating his 'hold' recommendation.
The shares trade on a P/E multiple of 10 times forecast earnings for next year, versus a sector mean average of 12.7, according to Reuters data.
Construction company Galliford Try exits Top Stocks this month after Edward Legget took profits on the house builder after a strong run in the share price.
The company operates in four areas: group services, housebuilding, construction and public private partnership (PPP) investments.
Analysts welcomed July's trading update, which showed sales in line with expectations. Robin Hardy of Peel Hunt said the 2009 growth strategy was now reaping rewards.
'Another very solid trading update shows that the 2009 growth strategy is delivering as expected, and the next stage is now in hand. This plans to put an extra 300 basis points on the housing gross margin by 2015 through productivity gains,' he said.
The start of September saw Galliford Try’s Scottish business, Morrison Construction, awarded a £28 million construction contract forming part of a £45 million Moray Council project to upgrade flood defences at Forres in Northern Scotland.
The shares trade on a P/E multiple of nearly 11 times forecast earnings for next year, broadly in line with its sector, according to Reuters.
At the end of July the company raised £38.4 million from a share placing, equating to about 5% of the issued shares in the company.
Canaccord analyst Jeremy Dibb acknowledged that the placement would dilute net present value (NPV), but he emphasised that it would also remove any doubts about funding the expansion of its Moma titanium mine in Mozambique.
'Alternative avenues of financing were limited due to the conditions of the existing debt facilities put in place for Phase 1, until technical completion (expected in 2013),' he said.
'We maintain our BUY recommendation and 66p target price, which is based on 0.9 times (to account for execution risk in the 50% expansion) our NPV, prior to the raise.'
The shares trade on a forward price-to-earnings ratio of 10.9, according to Reuters data.
In the year to date the shares have surged 32%, and have risen from a low of around 10p at the start of 2009 to almost 150p presently.
Michael O'Brien, analyst at Canaccord, reiterated his 'buy' recommendation on the shares earlier this month after interim results that showed a rise in revenues from £114.6 million a year ago to £118.4 million this time around. Back in March the company sold its oil services division to a private equity firm for £75 million to focus on its doors and windows business and to reduce debts.
'We believe that the shares are well set to continue their recent outperformance, driven by continued recovery and growth opportunities in the North American market and initiatives to build the business internationally,' he said.
The shares trade on a P/E multiple of just over 13 times forecast earnings ratio for next year, broadly in line with the sector average, according to Reuters data.
The shares are more or less back to where they started the year, having recovered from a fall in April after interim results showed a 44% decline in profits at Penguin and a 75% slump in the professional division.
The shares trade on a forward price-to-earnings (P/E) ratio of 13.7, compared with a sector average of 7.5, according to Reuters data.
Reed Elsevier, another education and business publisher, also bows out from Top Stocks. It was previously a top-10 holding in the Artemis UK Special Situations fund, managed by Derek Stuart and Ruth Keattch.
Earlier this month Alastair Reid, analyst at UBS, lifted his target price for Reed Elsevier, believing investors' fears about changes in the academic publishing industry are overcooked.
Reid projects margins at Reed's science publishing arm to fall from 45% currently to 37% as a result of the move towards an 'open access' policy. However, he said this estimate is 'potentially conservative', and that burgeoning emerging market demand would drive growth.
'Reed Elsevier trades at 10-11x 2013 earnings per share – cheaper than most media peers and defensives, such as consumer staples, while broadly similar to telcos, despite increasingly delivering faster, resilient growth,' Reid said.
The shares trade on a forward price-to-earnings ratio of 12, compared with a sector average of 7.5, according to Reuters.
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Look up the shares
- Barclays PLC (BARC.L)
- Melrose PLC (NYN.L)
- Rotork PLC (ROR.L)
- Vedanta Resources PLC (VED.L)
- Virgin Media Inc (VMED.L)
- Xstrata PLC (XTA.L)
- Carnival PLC (CCL.L)
- Drax Group PLC (DRX.L)
- Galliford Try PLC (GFRD.L)
- Kenmare Resources PLC (JEV.L)
- Lupus Capital PLC (LUP.L)
- Pearson PLC (PSON.L)
- Reed Elsevier PLC (REL.L)