A City broker has listed the best picks for investors eyeing a pandemic recovery this year.
The best value stocks for investors eyeing a pandemic recovery in 2021 have been named by a City broker, with Balfour Beatty (LSE:BBY), Travis Perkins (LSE:TPK) and Go-Ahead (LSE:GOG) on the 31-strong list.
Peel Hunt said 2021 may be the year that value-orientated companies take centre stage after years of struggling against higher quality or those delivering more rapid growth.
Fuelled by vaccine breakthroughs in November, there are signs that some large-cap stocks have already benefited from this rotation in investment approaches at the start of 2021.
Peel Hunt’s 31 top value stocks are taken from across 14 sectors, with the building segment having the biggest presence through the selection of six companies, followed by travel and leisure with four, and real estate and mining with three each.
The metrics used to define valuation differ by sector, but the median price multiple across Peel Hunt’s list is 13x 2021 earnings, dropping to 9.9x in 2022.
Last year’s list saw a 6% decline in total returns, dragged lower by Cineworld (LSE:CINE) and N Brown (LSE:BWNG), but this still compares favourably with a drop of 9% for the FTSE All-Share. The best performers were Premier Foods (LSE:PFD) (up 165%), Pan African Resources (LSE:PAF)(103%) and venture capital firm Draper Esprit (LSE:GROW) (38%).
Premier and Pan African are back on this year’s list, with the Mr Kipling and Bisto maker seen as “excellent value” on 10.6x 2022 earnings as it continues to benefit from favourable trends caused by more people working from home.
Improving cash generation means Premier is in a virtuous circle where expensive debt can be retired and funds released for increased marketing and productivity enhancements.
Analyst Charles Hall said: “The shares have performed well, but there is significant further upside as the balance sheet normalises.” He has a price target of 125p.
Pan African is the largest gold mining company on AIM. It is also seen as offering further substantial value in 2021 based on expectations for a step up in cash generation over the next three years.
Peel Hunt describes its 31p target price as highly conservative as it does not include any value from the Egoli development project at the company’s existing Evander mine.
Peruvian gold and silver producer Hochschild Mining (LSE:HOC) is another of Peel Hunt’s picks in the sector, with an expectation that the shares will hit 300p. They are currently 219p, having fallen recently after chairman Eduardo Hochschild sold a 12% stake in a placing at 200p.
The strong silver price offers upside to forecasts, and despite recent stoppages relating to Covid-19 the broker is hopeful of a prolonged recovery in production during the year ahead.
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Unsurprisingly, companies from sectors hit hardest by the pandemic and with the most to gain from vaccination roll-outs feature heavily on Peel Hunt’s list. They include Go-Ahead and FirstGroup (LSE:FGP), with sizeable share price upsides to 1,650p and 115p, respectively.
Marston’s (LSE:MARS) and Mitchells & Butlers (LSE:MAB) are the pub sector picks at 105p and 275p, while Peel Hunt suggests buying West End property firm Capital & Counties (LSE:CAPC) despite ongoing uncertainty.
Its Covent Garden territory is an iconic piece of real estate that Peel Hunt is confident will retain its appeal once London emerges from lockdown. Analyst James Carswell has a price target of 180p and says the current valuation is at odds with its “unique and enduring qualities”.
He says: “For the patient investor, we believe that buying Capco’s shares at a 30% discount to our written-down net asset value offers an attractive entry point for such an enduring real-estate story.”
Balfour Beatty has weathered the pandemic storm better than most, but with a record order book of £17 billion Peel Hunt thinks the infrastructure business is still attractively valued, particularly as there’s scope for material shareholder returns.
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Analyst Andrew Nussey says: “Prudent long-term management has ensured Balfour Beatty has emerged in a stronger relative position.”
The biggest company on Peel Hunt’s value list is Travis Perkins, which the broker believes is a cheap way to access the UK’s repair, maintenance and improvement market. The demerger of Wickes and planned disposal of its plumbing and heating business should result in a clearer, trade-focused company, with potential for shareholder returns or mergers and acquisitions.
Peel Hunt has a price target of 1,800p after a fall of 16% in 2020 left Travis trading on 16x 2021 earnings, falling to 10.3x in 2022.
The six construction-related companies on the list include brick maker Forterra (LSE:FORT), which analyst Sam Cullen thinks should benefit from a return to 2019 margins by the 2022 financial year.
Shares fell by 31% last year. However, Cullen thinks that the current valuation for Hanson’s former UK building products division is undemanding for a company in a consolidated industry with high barriers to entry and a solid growth outlook.
Peel Hunt’s other value picks are Bank of Georgia (LSE:BGEO), Bloomsbury Publishing (LSE:BMY), Empiric Student Property (LSE:ESP), Headlam (LSE:HEAD), Ibstock (LSE:IBST), IDOX (LSE:IDOX), Jadestone Energy (LSE:JSE), Keller (Keller), Kenmare Resources (LSE:KMR), Kin and Carta (LSE:KCT), Rank (LSE:RNK), RDI REIT (LSE:RDI), Redrow (LSE:RDW), Renewi (LSE:RWI), RHI Magnesita (LSE:RHIM), Serica Energy (LSE:SQZ), Spire Healthcare (LSE:SPI), The Gym Group (LSE:GYM), TI Fluid Systems (LSE:TIFS) and Vistry (LSE:VTY).
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