In January 2007, we asked five of our top share tipsters to come up with a ‘retirement’ portfolio of shares that they’d be happy to hold onto for five years or more. Here’s what they think of them now.
Shell (RDSB) – tipped by James Ferguson at 1,719p, now 1,658p. (-3.5%)
According to analysts of the ‘glass-half-empty’ variety, Shell’s request to include its tar sands in its official reserves shows just how short of alternative oil and gas resources it is. But now that Canadian oil sands may represent the largest untapped oil reserves on the planet, perhaps the obtuse SEC rules governing what they allow companies to call ‘proven reserves’ need to be updated and clarified.
In any sense that you or I would consider reasonable, Shell’s probable reserves run to billions of barrels. After taking account of a fair price for Shell’s vast downstream operations in chemicals, transport and refining, today’s share price hardly values those reserves at all. On any reasonable measure, Shell is literally decades away from being close to running out of oil, and that’s beside the fact that it has a huge exploration budget.
Meanwhile, the profit outlook is driven entirely by the oil price, hence Shell making $4.99 a share, even though the consensus analyst forecast for last year was for just $4.11 (see the black line in the chart above). This year analysts are targeting an even lower $4.04. Yet the recent oil-price moves above $100 a barrel alone suggest analysts should start hiking their forecasts towards $5. At $5 a share, Shell is on a p/e of 7.3 and yields 4.4%. If oil stays above $100, Shell could even make $6 this year, which would mean it is on a preposterously low six times earnings. Analysts have been consistently (and wrongly) bearish on the company’s outlook. Once they get real, there’ll be some catching up to do.
HSBC (HSBA) – tipped by Paul Hill at 931p, now 800p. (–14.1%)
Banking stocks have dropped off a cliff in the past nine months on the back of colossal write-downs, the Northern Rock fiasco, and last week’s bale out of Bear Sterns. So my advice to buy HSBC, the world’s third-largest bank, at 931p, was ill-timed; the shares have duly fallen around 15%. While painful, this compares favourably to the rest of the UK banking sector and peers such as RBS and Citigroup.
After the brutal sell-off, HSBC is undoubtedly cheap, trading on a 2008 p/e of 10.9 and paying a 5.3% dividend yield. Yet is cheap good value? This depends on whether it can maintain its Tier 1 capital ratio (T1CR) without having to raise fresh equity. If it can, the stock looks oversold. On 31 December, HSBC’s T1CR (based on Basel II metrics) was a healthy 9.0%. The board’s target is to stay within the 7.5–9.0% range, which looks achievable, even if it is hit by another $15bn of losses.
As for earnings quality, more than 60% of HSBC’s profits are generated from developing regions, such as Hong Kong. This is reassuring, because even though the IMF downgraded its US 2008 GDP growth to 1.5% in February, it forecast that emerging markets would still expand by 6.9% this year – with China running at a 10% clip. As such, with this strong tail-wind, together with the notoriously frugal spending habits of many Asian consumers (meaning low credit defaults), HSBC’s earnings should continue to advance, regardless of a US recession.
BAT (BATS) – tipped by Charlie Gibson at 1,517p, now 1,873p. (+23.5%)
Since last year, BATS has outperformed the FTSE 100 index by 27%. It has also provided several good trading opportunities. Would I be happy to keep holding the company after such a good run? Yes. BATS’ full-year results for 2007 were better than expected, it has seen two earnings-enhancing acquisitions in the past month, and it is now projecting higher cost savings in the next five years than previously expected.
Also, rather than being blasé about its defensive qualities in the midst of a credit crunch, it is actively and sensibly managing its assets to preserve its credit rating. BATS’ historic p/e ratio has risen from under ten in 2000 to 17.4 now. But that is not expensive for a company expecting compound earnings growth of 9.8% over the next two years. As long as this is the case, I am happy being overweight in BATS shares.
Murgitroyd (MUR) – tipped by Tom Bulford at 487.5p, now 360p. (–26.2%)
Murgitroyd’s serene progress throughout 2007 saw the world’s only quoted patent and trade mark attorney deliver a sixth consecutive year of earnings growth and a doubling of the dividend. Patent applications filed with the European Patent Office have shown compound growth of 8% over the last ten years, and this trend is unlikely to be affected by the economic climate.
In February, Murgitroyd acquired a Scottish rival, the Glasgow-based patent attorney Kennedy, in a deal that will yield useful synergies and boost its ranks of qualified staff. The shares have suffered from some tax-induced profit-taking and now trade on around 15 times earnings for the year to May 2008 and yield 2.8%.
BHP Billiton (BLT) – tipped by Tim Price at 936p, now 1,445p. (+54.4%)
BHP Billiton has returned about 60%, outperforming the FTSE Mining Index by about 10%. Its offer to acquire Rio Tinto has been muddied by Chinalco and Alcoa, who last week bought a 12% blocking share in Rio Tinto. Perhaps more significantly, the US economy, on the back of the housing and financial slowdown, looks like entering recession this year, leaving industrial metals pressured. But I would be using pullbacks in BHP Billiton to purchase more – Asia’s rise is not a short-term phenomenon and BHP Billiton remains well placed as a global supplier of hard resources to emerging and developed markets.