Every week, a professional investor tells MoneyWeek where he’d put his money now. This week: David Karsbøl, market strategist, Saxo Bank
The past month has been dominated by fears about the subprime mortgage market in the US and its potentially negative knock-on effects on the broader economy. With the equity markets jittery and having tested previous highs in the S&P 500, there may be a period of consolidation before either a definitive move higher, or stockmarket bears talk stocks down (despite their attractive price/earning ratios in most parts of the world). In other words, market participants are still making up their mind on the subprime effect.
In the meantime, what should stockmarket bulls invest in? My take would be low-beta, value stocks (stocks that don’t tend to track the market closely), which would not be as heavily affected by a broad market sell-off. Sector-wise, I’m generally looking for stocks with zero or low exposure to mortgages and mortgage-related financials. The oil and gas services sector is one of our darlings. We expect this industry to outperform over the next few years, thanks to huge, pent-up demand caused by several years of low capital investment in the sector.
One of our favourite UK stocks, Primary Health Properties (PHP), purchases freehold and long-lease healthcare properties in the UK. Since the firm leases its properties to the authorities and the NHS, the downside should be limited. Additionally, the still-strong UK property market might help to boost the firm’s balance sheet. The estimated p/e of 24 times is rather high, but the shares have been traded on an elevated p/e for long periods in the past five years, which has been justifiable in light of high earnings growth. Given that the company has demonstrated its remarkable ability to improve its finances, investors might find the risk worth taking. Furthermore, the stock’s dividend yield and dividend growth are decent. Sure, the technical picture isn’t too pretty. However, investors might get a decent risk-reward by buying the firm at around 330p-340p if it goes that low, then cutting their losses if it breaks the long-term 50% Fibonacci Retracement. (For those unfamiliar with technical analysis, that’s at 326p. A short-term target could be as high as 430p.)
Another value share is Sondex (SDX). The company manufactures tools and surface equipment for oil and gas production firms. We feel that places it at a very attractive point in the energy production chain. Although we are long-term energy bulls, we recognise that oil prices may dip in the short term. But regardless of what happens to energy prices, the oil and gas services sector will still benefit from strong demand because the sector is undercapitalised. Indeed, as oil gets increasingly hard to extract from underground, demand will grow for ‘clever’ equipment that can assess both field potential and the ease with which oil can be brought to the surface.
Sondex has had very solid and stable earnings growth in the past five years, which has resulted in quite a high p/e ratio in the 30-40 range. The current forecast p/e is about 16.5 times, which would be its lowest ever. The dividend yield is only about 0.8%, but dividend growth is strong, which is usually a good sign. In our opinion, Sondex will be a tough, long-term performer in an attractive industry. The shares look interesting above 320p, where we believe it is a case of buy-on-the-dips. If the stock closes below 320p, we recommend closing the position and taking the loss. Our end-of-year target is 400p or more, although this depends on this month’s earnings release.
The stocks David Kasbøl likes
Stock, 12mth high, 12mth low, Now
Primary Health Properties, 535.25p, 346p, 388.25p
Sondex, 395p, 249p, 330.75p