MoneyWeek’s comprehensive guide to this week’s share tips
Three to buy
Legal & General
The Daily Telegraph
Legal & General is one of those stocks that many investors would love to have bought after the referendum when the price briefly fell to 166p, but it remains good value even now. Growth is “roaring” and the new auto-enrolment rules for workplace pensions may give it a further boost. The shares yield 5.4% and management has shown a “reassuring” commitment to the dividend in recent years. 249.5p
Phoenix Group
The Mail on Sunday
Phoenix Group is the largest closed-life insurance company in the UK, meaning its funds are closed to new members. So it doesn’t have to spend money attracting new policyholders and can predict future cash flow with reasonable accuracy. Add in a healthy dividend – forecast to be over 7% for this year – and this is a buy for the long term. 748.5p
Next
The Daily Telegraph
A profits warning at retailer Next (its wares are modelled in the picture) drove the shares down 41%. Rising costs from weaker sterling and a slowdown in consumer spending are worries, but it has low debt and a strong record of cash generation to support the 4.5% dividend yield. A risky bet, but at an attractive price. 4,089p
Three to sell
PureCircle
The Times
PureCircle produces stevia – a low-calorie alternative to sugar – and should gain market share if soft-drinks makers take it up. But US authorities have been impounding shipments of stevia on suspicions that it had been produced by convict labour in China. PureCircle makes a third of its sales in the US, and the uncertainty and lack of any other product lines means the shares are best avoided. 240.25p
AO World
The Sunday Times
AO World is one of the UK’s fastest growing retailers, with a 20% share of the “white-goods” market. But selling appliances such as washing machines is not very lucrative, and the stock has not recovered from a profit warning two years ago. The market is right to be sceptical and more trouble could be in store when tough new accounting standards come in next year. 180p
B&M European Value Retail
The Times
In common with other discount retailers, B&M has been outperforming the broader retail sector after strong Christmas trading figures. But these positive trends cannot be expected to continue. Shares in discount retailers command higher multiples than other retailers to reflect better growth, but with B&M trading on 20 times earnings, the valuation looks full for the time being. 303.25p
And the rest
The Daily Telegraph
Investors should sell retailer Debenhams (52.75p). The firm is seeing its market share in clothing dwindle and is yet to make much progress in more lucrative areas, such as beauty products.
The Times
Construction outfit Costain is a solid bet on UK infrastructure spending (371.75p). Legacy claims linked to asbestos exposure are dogging energy services group Cape, but the shares are good value if it can maintain its 7%-plus dividend yield (178.5p). Cybersecurity firm NCC Group has good long-term prospects (188.75p). Recruiter Staffline should do well from new contracts (855p).
Top tips for 2017 from Barron’s
Google’s parent company Alphabet is “a great business at a reasonable price” ($747.92), says Barron’s in its top ten picks for 2017. Fellow tech giant Apple trades on a price/earnings ratio of just nine once you factor in its $150bn of net cash ($109.47). And Citigroup is the “cheapest of the big financials”, trading at below tangible book value ($57.27).
Media group Walt Disney has “one of the world’s best brands”, despite worries over rising costs at sports network ESPN. ($98.94). Pharma firm Merck has a blockbuster in its lung-cancer drug Keytruda ($60.76). Delta Air Lines is run “like a disciplined industrial company but it’s still valued like an airline” ($47.77). It’s a good play on a stronger US economy, as is housebuilder Toll Brothers, which is trading near liquidation value ($29.14).
European markets trailed the US in 2016, but “many leading European companies offer good value”. These include diversified pharma firm Novartis, which could see earnings rise at 10% per year in the coming years (CHF68.85). Phone firm Deutsche Telekom yields 4% and “gets little credit for its valuable controlling stake in T-Mobile US” (€14.65). Consumer-goods company Unilever isn’t cheap but trades at a discount to peers and is well placed in emerging markets (3,097p).
IPO watch
Private-equity giant Blackstone is to float its property rental firm, Invitation Homes, on the New York Stock Exchange in the next couple of weeks, says Antoine Gara on Forbes.com. Blackstone “bet big” on housing in the aftermath of the 2008 credit crunch: it spent an estimated $9.6bn on bargain-basement houses across the country, “scooping up thousands of properties nationwide and turning them into rentals”.
Dallas-based Invitation Homes now enjoys an occupancy rate of 96% in its 50,000 properties, each bringing in an average monthly rental of $1,623. The company will list as a real-estate investment trust (Reit), meaning it will have to pass the majority of profits onto investors in the form of dividends. The listing is expected to “fetch a valuation north of $5bn”, based on the valuation of one peer, American Homes 4 Rent. Part of the proceeds will be used to reduce the firm’s $8bn debt load.