This week, I have a nice balance between high- and low-risk tips. But as always, I do recommend that you assess how much risk you are prepared to take on, and what sort of returns you expect to make. I say this as last week Torex Retail, a stock I recently tipped on these pages (see A tempting software stock), surprised the market with negative news on a £15m disputed contract with Alphanumeric. The share price fell and closed last Friday 36% down on the buy price.
It’s never good news when shares head south, but successful investing requires patience, so it’s important to reassess your portfolio regularly. For instance, since starting this column on 2 June, I have tipped 22 stocks as buys, of which five are nursing losses, one is unchanged, and 16 are higher as of 18 August. The two biggest fallers, Torex Retail (–36%) and Pixology (–32%), were both highlighted as high risk, and their losses have disproportionately affected returns. Yet the average gain for the 22 tips has been 3.1%, compared with the FTSE 100’s 4.0%, the FTSE All Share’s 2.5% and Aim’s –7.9% over the same period.
I would still for the time being suggest holding Torex and Pixology as part of a well-diversified portfolio. But be prepared for more white-knuckle rides.
Tip of the week: Barclays (BARC, 643p), tipped as a BUY by Merrill Lynch
For those of a more cautious disposition, the banking sector – particularly those companies with greater international exposure – is currently offering good long-term value. Previously, I have tipped Royal Bank of Scotland and HSBC, and I will now add Barclays to this list.
Barclays is a global financial services company providing retail and corporate banking, credit cards, merchant banking and fund management services. It has a market cap of £42bn. In the past two years, the firm has expanded overseas. In 2004, 75% of the group’s profits were generated in the UK; this is now down to 50%. In particular, Barclays has substantial foreign operations in Africa, Europe and the Middle East. Although the bank is still clearly exposed to the UK economic cycle, this level of diversity provides earnings stability along with growth opportunities. Bad debts aren’t a major concern – although they jumped by 30% on a like-for-like basis at the interim, this is still manageable when compared to the total size of the loan book. Provisioning is low by historical standards and the credit-quality issue looks largely confined to unsecured UK retail lending.
Consensus earnings per share forecasts are 62.7p and 67.8p respectively for this year and next, putting the shares on paltry p/e ratings of 10.4 and 9.6. With a dividend yield of 4.6%, which is twice covered by earnings, the stock is appealing to value and income investors.
Recommendation: good value – BUY at 643p
Paul Hill’s personal portfolio has gone up by 483% over the last five years. To find out more about his own specialist share-tipping service, ‘Precision Guided Investments’, click on the link below: