MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK’s financial pages.
Three to buy
Blue Prism
The Mail on Sunday
Blue Prism is a pioneer in robotic process automation, “a fancy way of describing computer software that helps businesses do boring tasks more efficiently”. Clients include Coca-Cola, Heineken, Daimler AG, Jaguar Land Rover, eBay and Boots-owner Walgreens. NHS self-check-in kiosks also depend on the firm’s technology. Heavy investment means that the group remains loss-making. However, recent share-price falls present a buying opportunity for “medium to long-term” investors to support a world-leading British business operating in a fast-growing field. 1,344p
SDL
Shares
This niche translation software business helps multinational clients with the sort of nuanced and confidential translation tasks that machines cannot manage alone. SDL has been listed for nearly two decades but is still not widely known, despite counting 88 of the world’s top 100 brands among its clients. Operations across 39 countries provide valuable diversification. Operating margins are increasing and improving cash flow may see the business rerate as a quality growth stock. 550p
Synthomer
The Sunday Telegraph
This FTSE-250 chemicals group is focusing on polymers, which are used in everything from industrial coatings and construction to latex gloves. Performance has been hampered by a lack of reasonably priced acquisition opportunities and a more bearish global growth outlook. But significant capital expenditure is likely to drive impressive earnings growth this year. The shares also look very reasonable on 11 times this year’s earnings, compared with the European average of 15. 365.8p
Three to sell
Finsbury Food
Money Observer
This cakes and bread maker has been contending with a “shock” rise in the price of butter and other ingredients, consumers’ tightening their belts and “tightfisted” retailers such as Tesco and Booker, whose merger last year is putting pressure on suppliers. The solution is for Finsbury Food to add scale, but buying up bakeries is expensive and previous acquisitions have already driven down returns on capital to a “pedestrian” 8%. The shares appear cheap, but there is no obvious way “out of this bind”. 80.64p
Metro Bank
Investors Chronicle
Shares in this challenger bank have plunged by almost a third following a warning that profits and regulatory capital levels for 2018 will undershoot market expectations. The bank has also been forced to increase the risk weighting ascribed to some of its loans following a “misinterpretation of the rules”. Metro Bank seems to be “paying the price of its aggressive expansion strategy”. Nonetheless, the shares are trading at a similar book value to “better-capitalised, dividend paying” peers such as Lloyds. Sell. 1,550p
Pearson
The Daily Telegraph
This educational publisher was the best performer of the companies included in the FTSE 100 for the whole of 2018. Yet on a yield of 2.2% the stock now appears “overbought”. A recent trading statement implies that cost-cuts are playing an outsized role in driving profit growth, casting doubt on the underlying quality of the group’s earnings. A shift to free and online educational materials remains a long-term threat. Steer clear. 915.89p
…and the rest
The Daily Telegraph
US medical testing business Quest Diagnostics has a loyal customer base, while new medical pricing rules give it the opportunity to acquire smaller rivals ($86.30). The Hipgnosis Songs Fund buys up the rights to music and enjoys the royalties – a “better business model than Spotify’s” (107.25p). Fulcrum Utility Services focuses on “last mile” connections between consumers and the national gas and electricity network, a business ignored by larger operators. The shares yield 4.6%. (45.35p).
Investors Chronicle
Mondi is well placed to reap the rewards of a shift to paper-based packaging amid a backlash against plastic (1,826p). Investors with “room for risk” in their portfolio should buy Allergy Therapeutics ahead of trial results for a new birch allergy drug (14p).
Shares
The sale of its underperforming American crafts division will help specialist threads maker Coats to reinvent itself as a high-margin business (84.4p). Safety controls maker Strix says that the kettle market is growing at 7%. Analysts are targeting a share price of 210p (148.2p). Don’t be blinded by Vodafone’s 9.5% forward dividend yield – there are “serious question marks” about the long-term investment case (144.04p).
The Times
Increased volatility should be good news for spread better CMC Markets, but new regulations governing trading in derivatives make the shares unappealing (117.5p). A run of bad news at animal health company Animalcare has driven the shares to a five-year low and there is scant evidence that things will improve anytime soon (137.5p).
An American view
Hercules Capital, an American venture capital group, is “almost bulletproof”, Scott Black of Delphi Management told the Barron’s Roundtable. It is extremely good at what it does: not only has it helped develop Facebook and Pinterest, but since it was established in 2003 it has only had to write off an average of 0.04% of its loans every year. It is funding 89 firms, with most loans worth around $20m-$30m. Despite its impressive track record, the market seems to be overlooking it. The group is on a very reasonable trailing price-earnings ratio of 10.7, while it yields 9.7% (the dividend is funded by cash flow, not borrowing). A buyback programme may give the stock a well-deserved lift.
IPO watch
The deal to end the US government shutdown is especially good news for a dozen biotech firms that had filed for initial public offerings (IPOs) in December, notes Bertha Coombs on CNBC. Had the standoff lasted any longer, their flotations could have been delayed for months. One group likely to come to market very soon is Gossamer Bio, which specialises in immunotherapy drugs. It lost $108m in the first nine months of 2018. Other companies will soon follow, as the shutdown could resume in three weeks. The “rush to get out of the door”, says Kathleen Smith of Renaissance Capital, bodes well for investors as it implies a “buyer’s market”.