British retail investors’ favourite shares have been revealed in a recent survey based on data from two of Britain’s biggest stockbrokers, HBOS and TD Waterhouse. As a one-off special, therefore, I’ve decided to review the top five buy tips from this list (reported in last week’s Investors Chronicle). They may be British investors’ favourites, but are they the best?
Favourite British shares #1. PartyGaming (PRTY: 125p)
My view: good value
With a market cap of more than £5bn, PartyGaming is undoubtedly the granddaddy of the online gambling sector. It was listed on the London Stock Exchange at 116p last June and since then its shares have fluctuated wildly. Investing in it would in fact have been a bit like playing poker on one of its websites. Clearly, this is not for widows and orphans; however, on a p/e of 13 and offering a dividend yield of 4% for 2006, the shares are not expensive. With 13% earnings per share (EPS) growth expected in 2007, I rate them as good value.
Favourite British shares #2. Lloyds TSB (LLOY: 520p)
My view: hold
Lloyds is attractive if you’re after income. It pays out a whopping 6.8% dividend yield and trades on a forward p/e of only 11. Having said that, EPS growth is forecast at a sluggish 5% a year for the next two years, which is in line with the rest of the British banking sector. In the absence of a foreign predator bidding for Lloyds, the shares will only tread water within their present 450p-550p trading range for the rest of the year.
The key downside risk would be if interest rates rose and beleaguered British consumers couldn’t service their already huge debt levels, leading to substantial bad-debt losses. In this scenario, the dividend would be in jeopardy.
Favourite British shares #3. Vodafone (VOD: 127p)
My view: sell
Vodafone ranks as the perennial underachiever. Frustratingly for shareholders, it is continually being recommended as a buy, but more often than not fails to deliver. This has not been helped by the recent boardroom bust-ups, slowing growth, reduced operating cash flow and colossal write-offs. To cap it all, approximately 30% of its £75bn valuation is locked in Verizon Wireless, a non-dividend-paying minority stake in the US. Verizon would appear to be the only realistic buyer and it seems any sale proceeds would incur a value-destroying capital gains tax bill. Indeed, the phrase “between a rock and a hard place” springs to mind.
With lacklustre EPS growth of 7% for the next two years, I can’t see the share price rising from current levels. I recommend selling the shares because there’s also a big potential risk on the horizon. Voice-over Internet Protocol (VoIP) could seriously damage its current rich earnings before interest, tax, depreciation and amortisation margins of 40%. It has not yet launched a quadruple play service (voice, video, internet and mobile), and thus risks falling behind major competitors, such as Orange.
If profit margins were to fall by 5%, then assuming no change to the rating, I see the shares plummeting to below 100p.
Favourite British shares #4. Tesco (TSCO: 320p)
My view: take profits
What a success story Tesco has been for a British firm. Fifteen years ago, Tesco ranked second behind Sainsbury in the pecking order. Now, with a 31% share of the UK grocery market, it is nearly twice as large as Asda, its nearest competitor. Furthermore, as a defensive play, even if the economy took a nose-dive, there is a strong argument that Tesco will continue to prosper (albeit at not quite the same speed as in recent years) as consumers become more price conscious. At 320p, the shares are on a 2006 p/e rating of 16.6, which in my mind is a bit toppy, considering that EPS growth is forecast to be only 8%-10% to 2008. Thus purely on valuation grounds, I would recommend shareholders take profits.
Favourite British shares #5. BP (BP : 637p)
My view: take profits
BP CEO Lord Browne has done a terrific job. The firm has now overtaken Shell and is the UK’s largest oil group, with a market cap of £127bn. Clearly the success of the firm depends on the price of oil, the level of production and the ability to replace reserves at economic prices. That crude oil is persistently staying above $70 per barrel at least provides an excellent tailwind. However, production is due to grow at only 3% this year, while reserves are expected to stay flat.
Although BP is valued on a miserly 2006 p/e ratio of 10.5, one needs to consider the cyclical nature of the industry. BP’s profit-before-tax margins have more than doubled from 6.2% in 2002 to 12.7% in 2005, obviously reflecting the appreciation of the oil price. In my opinion, these bumper profits can’t continue forever.
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: