Interactive Investor

Seven top stock picks from the FTSE 100

8th February 2023 13:06

by Graeme Evans from interactive investor

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There’s significant upside potential for certain stocks in 2023, argues this analyst. Our City writer explains the thinking behind the tips.

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A list of top stock picks from across Europe includes NatWest Group (LSE:NWG), AstraZeneca (LSE:AZN) and Shell (LSE:SHEL) after a City bank said there is still “significant upside potential” for certain stocks.

Bank of America also likes HSBC Holdings (LSE:HSBA), Informa (LSE:INF), Flutter Entertainment (LSE:FLTR) and Ashtead Group (LSE:AHT) in the FTSE 100, as well as oil and gas exploration firm Energean (LSE:ENOG) in London’s second tier.

Its selections come as the bank’s strategists adopt a cautious stance on the outlook for the first half of this year, even though UK and European markets are currently on the front foot.

They are more positive for the second half as financial conditions are expected to ease, although across 2023 the bank expects 12-month forward earnings per share to decline by about 20% in the Stoxx 600 index due to weaker growth and margin pressures.

The bank added in its year ahead note: “Despite a challenging macro backdrop, our analysts still see significant upside potential for certain stocks.”

In the financial sector, the bank retains its positive stance by emphasising that most of the interest rate cycle is still ahead for earnings. Post the rate-cycle peak, it expects volumes to drive further income growth and points out that loan books are half as risky as a decade ago.

Naming HSBC and NatWest as its preferred picks in Europe, the bank said: “Overall, we see the sector offering strong earnings and dividend growth on trough multiples and peak yields.” The price targets on the pair are 720p and 430p respectively.

Its analysts adopt a less positive stance on the insurance sector, moving from bullish to balanced as it downgrades six stocks due to fading yield appeal. However, it thinks the sector overall is operationally resilient against macro challenges.

In energy and utilities, the bank’s oil and gas analysts still see 10% upside to consensus 2023 earnings per share across Big Oil and select Shell as a top pick along with gas exploration and production (E&P) company Energean.

They have a target price of 3,100p on Shell, describing the company as the most cash flow generative in its peer group thanks to one of the lowest breakeven oil prices in its upstream portfolio. There’s also support from Shell’s leading role as a global LNG supplier with exposure to upside in gas prices from tighter-for-longer LNG markets.

Energean, which recently achieved the milestone of the first gas from its flagship Karish project in Israel, is seen as having the potential to reach 2,000p based on a “clear runway” to become one of the leading E&P companies in Europe. Shares are currently 1215p.

The two top picks in healthcare are Merck & Co Inc (NYSE:MRK) and AstraZeneca, with the latter’s best-in-class drugs pipeline seen as laying the foundations for premium long-term growth. The bank said: “We expect multiple product launches and catalysts to drive meaningful sales growth at Astra for the first time in almost a decade.”

Elsewhere in the FTSE 100, Flutter Entertainment is backed on the grounds that its FanDuel business places it in the best position to capture market share in the liberalising US sports betting market. The company is also seen as facing the lowest earnings risk from a potential £2 stake cap for online gaming. Shares are backed to reach 16,800p.

In the building sector, the bank prefers infrastructure and energy efficiency exposure over housing and thinks distributors are at risk of moving from inflation to deflation.

One of its top picks in this sector is Ashtead, a move that reflects a solid growth outlook supported by factors such as market share gains from smaller peers, the breadth of the group's rental offering and potential returns to shareholders. The bank has a 6,600p target.

On exhibitions and business information group Informa, it expects shares to re-rate as confidence in the company’s transformation into a faster-growing and more digital events and academic publishing business builds. It also sees the potential upside from the recovery of events demand through 2023-24, leading to a price target of 860p.

Other UK-listed stocks mentioned in Bank of America’s look ahead report include Harbour Energy (LSE:HBR), Watches of Switzerland (LSE:WOSG), Rentokil Initial (LSE:RTO) and Spirax-Sarco Engineering (LSE:SPX).

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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