MoneyWeek’s contributors share their favourite investment ideas for 2020, ranging from Singaporean property to global equities.
Richard Beddard
For decades, consumer goods manufacturer PZ Cussons (LSE: PZC) was a reliable growth stock. But over the last five years, its fortunes have reversed.
Revenue and profit are in decline and the coffers are depleted. In 2018, PZ Cussons sharply reduced capital expenditure and did not increase the dividend for the first time in many years. It kept the financial screws tightly turned in the year to May 2019 too.
The company’s problems are both self-inflicted and the result of external events. It borrowed to buy brands that have been less profitable than expected. In developed markets such as the UK and Europe, brands face increased competition on two fronts: the internet, where consumers have much more choice; and discount retailers, who have developed their own copycat products. In Nigeria, until recently one of PZ Cussons’ biggest markets, the economy has been rocked by low oil prices and internal conflict. The company is profitable but contracting and last week it dispensed with its longstanding CEO. It has yet to appoint a replacement.
That’s the bad news. The good news is that PZ Cussons is committed to restoring its fortunes by selling off weaker brands and rationalising in Nigeria. It is ploughing the money from disposals and the savings from efficiencies into stronger brands, typically personal care and beauty brands such as Imperial Leather soap and fake tan St.Tropez. The plan is to improve the products, differentiating them from copycats and competitors, and sell them in more countries.
PZ Cussons’ share price of 192p is half its historical high in 2013. In one sense that too is good news. The collective gloom may mean the shares are undervalued on an enterprise multiple of about 12 times adjusted profit. On the other hand, there is no telling when six years of negative share price momentum will reverse. This idea, then, is for patient long-term investors only.
Jonathan Compton
I’ve had a storming run in my portfolios from my most overweight sector: warfare (22% of our family funds) – or for squeamish investors, defence. Great performers include America’s Raytheon (missiles), Germany’s Rheinmetall (best tanks in the world) and the UK’s Chemring, QinetiQ and Cobham (about to delist after a successful takeover bid).
Yet among these winners has been the mangiest of dogs. In 2009 I invested at £5 per share, confirmed my brilliance as it rose to £13 in 2014 then stupidly gawped as it fell to £4.50 by the middle of 2019 as management blundered around.
I intend to double up soon, not always the smartest advice for losers but in this case I am sure that “The Force” is with me. And the company? Babcock International (LSE: BAB), a truly global defence group with 70% of sales from overseas. It builds or participates in almost everything from nuclear plants to frigates, submarines, aviation and systems management. Profits are evenly spread across its land, sea, air and nuclear operations.
The compelling numbers include a forward multiple for 2020 of a mere nine times and a 5% dividend yield. Debt is low and it trades at a smidgeon above its book value. The order book is a robust £18bn and the relatively new chair, CEO and other key appointees seem sensible.
There are actually four “Forces”. Western governments have woken up to the often lamentable state of their armed forces so defence budgets are rising; the ever-nihilistic and opportunist Russian government is a clear threat and China’s remorseless expansion of its armed forces is another; while the reliability of America as an ally is in doubt.
In 2019 takeover approaches were made by a private equity firm and the outsourcing group Serco. With a market capitalisation of only £3bn it is vulnerable; if it stumbles again it will be gobbled up. What’s not to like?
Subscribers can read it in the digital edition or app