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Top managers pick 9 'special situation' stocks for 2016
Top fund managers pick nine stocks undergoing transformation that could reap the benefit in 2016.
by Sean Butters on Jan 15, 2016 at 13:25
Citywire AA-rated Steve Davies believes 2016 could be the year Lloyds regains its status as a ‘normal company’ and a core holding for income funds as investors receive more clarity over its dividends.
Lloyds paid its first dividend since the financial crisis last year, but the bank’s payments are expected to rise substantially from the 0.75p final dividend for 2014, and an interim payout of the same amount for 2015.
‘We should have much greater clarity in 2016 on the company’s ability to pay substantial dividends going forward,’ he said, adding that the risk of punitive regulation for banks now seemed less severe.
‘We now have much greater certainty from the Bank of England in terms of capital requirements, and also the prospect of a time bar on payment protection insurance [compensation] which has been a big drain on profitability over the last few years,’ he said.
‘All of this should be a key a underpinning to the retail offering of shares, promised for the spring, which should get the government off the share register altogether.’
After heavy investment in the business that left the shares delivering an underwhelming performance over the last year, Citywire AAA-rated Stephen Message believes telecommunications business Vodafone could return to form in 2016.
‘It has changed a lot of during the past couple of years, and [this] year they should start to see the reward of the increased investment they have made,’ he said.
‘Cash flow growth should start to go up, end markets are becoming a bit more “rational” – such as consolidation in Germany and potential consolidation in the UK and Italy – and there should also be more monetisation of the use of data services,’ he added.
‘Dividend yield is currently around 5%. The market isn’t expecting a lot of dividend growth this year, but a bit further out towards the back-end of the decade we should start to see a lot of this recent investment turn around.’
Dixons Carphone (DC)
JPMorgan Claverhouse (JCH)
Shares in Dixons Carphone have enjoyed a strong run since electricals retailer Dixons merged with mobile phone store Carphone Warehouse in August 2014.
But while the shares have risen 35% over that period, William Meadon believes they have further to go.
‘Dixons Carphone has sales of over £10 billion with double-digit earnings growth currently anticipated over the next two to three years,’ he said.
‘In the short term the company is still benefitting from the cost and revenue synergies of merging the two businesses. Stores are being rationalised and modernised to offer customers the best and most comprehensive offering both online and offline. The company now price matches Amazon on most products, but, unlike Amazon, also offers high street stores where products can be showcased and trialled, to help increase the likelihood of a purchase.’
Over the long term, Meadon also sees promise in the company’s little-known Combined World Services business.
‘This division, currently in embryonic form, offers a range of services to corporates including connecting phones for Apple, running Samsung’s European stores and Sprint’s US consumer-facing operations. Moreover, an increasing range of home services are soon to be offered,’ he said.
AG Barr (BAG)
Citywire A-rated Ashworth-Lord’s fund may represent something of a mouthful, and at £26.5 million may not be the biggest, but with a three-year return of 63.8% that places it in the top five funds in the Investment Association’s UK All Companies sector, it boasts a strong record.
Ashworth-Lord believes AG Barr, the soft drinks maker best known for Irn Bru, could be due a resurgence in 2016. The shares have been in the doldrums over the last year, falling 12%, despite an unbroken earnings growth record stretching back over a decade.
‘The business consistently produces a return on equity in excess of 20% and converts over 80% of its earnings into free cash flow, leaving it with a strong balance sheet,’ he said.
‘It has a roster of powerful brands conferring pricing power. It follows that I believe the company is well placed to bounce back quickly from this year’s hiatus, giving some impetus to share price recovery in 2016.’
Aerospace and car parts maker Senior endured a torrid 2015, with a spate of earnings downgrades leasing to the shares losing a quarter of their value over the course of the year.
But Laura Foll, manager of the Henderson UK Equity Income & Growth fund alongside Citywire AA-rated James Henderson, believes the company is due a turnaround in fortunes.
‘Senior has had earnings downgrades in 2015 as a result of difficult end-markets in sectors such as agriculture and energy, as well as the faster-than-expected decline of some of the older civil aerospace programmes, such as the A330,’ she said.
‘However, it is winning higher content levels on newer civil aerospace programmes, such as the A320neo, as well as upcoming defence programmes such as the F-35 fighter jet. As these new programmes ramp up delivery levels it leaves Senior well placed to grow sales and maintain what are already good mid-teen margin levels. For shareholders this should mean strong cash generation on top of an already robust balance sheet.’
Citywire AA-rated Fraser Mackersie believes shares in Lavendon are now undervalued after being hit by the broad sell-off in equipment rental firms over the course of 2015.
‘Lavendon shares have been significantly sold off during 2015, in sympathy with what we view as more stock-specific issues at other equipment rental firms. These shares are now materially undervalued in our view,’ he said.
The shares have fallen by more than 20% over the last year, but healthy forecasts belie the sell-off, he said.
‘Consensus market forecasts are predicting earnings per share of 17.15p for 2015, and a full year dividend of 5.14p, leaving the shares trading on a forward price-earnings ratio of just 7.9 times and a forecast yield of 3.8%,’ he said.
‘Dividend cover of over three times provides scope for further growth in the dividend payment,’ he added.
Citywire AA-rated Hugh Yarrow believes insurance broker JLT’s investment in its burgeoning insurance business will pay off in 2016.
The shares have traded sideways over the last year, as low interest rates have continued to weigh on the business.
‘This year’s earnings are also being burdened by JLT’s significant organic investment in its new US insurance business, and the impact of regulatory and policy change in its pensions consultancy business,’ said Yarrow.
‘However, JLT is taking market share in this downturn, taking advantage of lower insurance rates to increase coverage for clients, and driving growth in new sectors such as cyber insurance,’ he added.
‘Looking ahead, the US business will begin to generate and grow profits, and when the insurance cycle ultimately turns JLT will see a significant benefit to cash flows.
‘The potential for healthy dividend growth over coming years is good, and the current dividend yield is 3.5% and nearly twice covered by free cash flow.’
C&C Group (GCC)
Citywire AAA-rated Alex Wright raised a glass to C&C Group, the Irish drinks maker that owns the Magners and Bulmers cider brands.
The company recently sealed a distribution deal with Pabst Brewing Company, a big US brewer, and Wright sees growth in the world’s largest economy as key to its success.
‘Not only does C&C enjoy high brand loyalty,’ Wright said, ‘but it’s also a cash generative company, operating in a market that should see structural growth internationally, including in the US, where the market is growing double digit,’ he said.
‘The stock is trading at very low valuations given its growing operating market environment and management’s continued commitment to a more efficient use of the balance sheet,’ he added.
‘The company could also prove to be an attractive takeover target given its strong brands and increasing consolidation in the sector.’
Better Capital (BCAP)
The only investment trust pick on our list, Better Capital has risen just 4% over the last year, although that was much better than the dramatic slump in the shares of sister fund Better Capital 2012 amid the collapse of package delivery firm City Link.
The original Better Capital fund did not invest in City Link, and for Tillett, its fortunes are tied to those of aeroplane parts supplier Gardner Aerospace, the private equity trust’s key holding.
‘It has a strong position on the Airbus A350 programme, underpinned by a huge order book, and revenues and profits are growing strongly,’ he said.
‘Moreover, because Gardner has now been restored to health, it could be sold during 2016 with the proceeds returned to shareholders. If this happens the unwarranted discount that Better Capital shares trade at is likely to close, resulting in an attractive return to shareholders.’
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Look up the shares
- C&C Group PLC (GCC.L)
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- Vodafone Group PLC (VOD.L)
- Senior PLC (SNR.L)
- Dixons Carphone PLC (DC.L)
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- Jardine Lloyd Thompson Group PLC (JLT.L)
Look up the investment trusts
- JPMorgan Claverhouse (Ordinary Share)
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Look up the fund managers
- Steve Davies
- Stephen Message
- Keith Ashworth-Lord
- Laura Foll
- Fraser Mackersie
- Hugh Yarrow
- Alex Wright
- Matthew Tillett