Despite a difficult year for investors, our head of equity strategy’s three income tips yielded an average 9.3%, and two out of three growth picks made over 30%. These are the stocks he likes this time.
Last year was one of the worst in living memory for many of the world’s major stock markets. Only the UK’s AIM 100 stopped America’s Nasdaq tech index from coming bottom of the pile, as small-cap and tech raced for the wooden spoon nearly all of 2022.
Sky-high inflation, rising interest rates, a cost-of-living crisis, China’s Covid policy and war in Ukraine remain a concern in 2023. The prospect of recession, which until very recently seemed a nailed-on certainty, has diminished very slightly, especially in America. However, weak US retail sales figures proved that nothing is certain right now.
We do know that US inflation is currently falling much faster than here in the UK where food and energy costs remain stubbornly high. That means central bank policymakers may slow the pace of future rate rises, although consumer resilience is still being tested.
Newfound optimism, or at least receding pessimism, turbocharged stock markets at the beginning of 2023. Already this year, Hong Kong, the French Cac 40 and German Dax are up around 8%, and the FTSE 250, which fell almost 20% last year, is up 4.5%, just ahead of the FTSE 100, one of last year’s star performers when is gained almost 1%.
Owners of cyclical losers have become winners in short time, among them easyJet (LSE:EZJ), InterContinental Hotels Group (LSE:IHG), Redrow (LSE:RDW) and Howden Joinery (LSE:HWDN), all generating double-digit gains so far in 2023.
Tip performance in 2022
A sharp rise in interest rates to get runaway inflation back under control wiped out many growth stocks in 2022. However, two of my three company growth tips did incredibly well. And all three of my income ideas came good, each yielding either slightly above or below 9%.
Of the growth tips, Franchise Brands (LSE:FRAN) did best, the share price rising 30% over the year. Building a portfolio of successful service businesses using a franchise model was clearly the way to go. iEnergizer(LSE:IBPO), which runs Indian call centres and supplies back-office outsourcing systems, also impressed, rallying 26%. A dividend yield in excess of 7% was the cherry on top, taking the total return to over 33%.
My final stock, Breedon (LSE:BREE), failed to live up to expectations. It’s one of the biggest and most successful construction materials companies in the country, but my optimism that it could recover from a decline through 2021 was misplaced. The shares have bounced in recent weeks, but they are still down over 24% on the tip price.
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Income was a popular theme in 2022, and, once again, my three stocks did exactly what they were picked to do. Diversified Energy Co (LSE:DEC) kept its promise to return regular dividends to shareholders, generating us a dividend yield of 9.8%. An 8.9% share price gain gives a total return for the year of 18.6%.
Housebuilder Persimmon (LSE:PSN) came good with a 9.3% yield, but rising interest rates and threat of recession meant the sector fell out of favour. The shares fell 45% for a total return of -36%. But M&G (LSE:MNG) was a star, paying out 8.7% and, even with a 3% decline in share price, still generated a total return of 5.4%.
Share price 380p; mkt value £795m; PE ratio NA; dividend yield NA
Fuel cell developer Ceres Power Holdings (LSE:CWR) is one of AIM’s most popular stocks. Its shares peaked near 1,600p during the Covid boom, but have headed south since. Delays in completing a China joint venture didn’t help, but anticipated completion in 2023 should be a major catalyst for the share price. Ceres has already signed three license deals for its technology, with major players Bosch, Korea’s Doosan Corporation and Japan’s Miura. Factories being built now should generate royalties for Ceres from next year, so progress here will be closely watched.
Share price 31.5; mkt value £99.8m; PE ratio 17.8; dividend yield 1.2%
Supplying private-label toilet tissue, kitchen towels, facial tissues and biodegradable wet wipes is not glamorous, but is very profitable. AIM-listed Accrol Group Holdings (LSE:ACRL) has a market-leading position and is growing fast. Despite rising costs, half-year results just published show volumes rose 14%, revenue 64% and a “substantial” increase in profit. It has a strong balance sheet and both annual profit and revenue are now expected to beat expectations. Accrol grew market share by volume to 21.5%, and this £2.5 billion market’s shift toward private label products is tipped to continue.
Share price 171.5p; mkt value £153m; PE ratio 30.7; dividend yield NA
Zoo Digital Group (LSE:ZOO) provides Netflix, Amazon and others with high-quality subtitling and dubbing services in any language and can localise content for global audiences. It also works for major Hollywood studios, global broadcasters and independent distributors whose new productions and back catalogues need multi-language content. Half-year revenue almost doubled, and the business swung from a loss to $3.5 million pre-tax profit. Zoo has a strong order book, satisfied repeat customers and just 4% of a market worth $1.5 billion, which Zoo thinks could double by 2030.
Share price 104p; mkt value £280m; PE ratio 4.9; dividend yield 7.1%
Recession or not, it’s always nice to own a company expected to grow profits significantly in the year ahead, which enjoys high operating margins and return on capital, is reasonably priced and can afford a generous dividend. Sylvania Platinum Ltd (LSE:SLP) runs platinum group metal, or PGM, processing plants across South Africa's Bushveld complex, the world's richest source of PGMs. It has mining rights for potentially lucrative projects too. Demand is growing and the business has $139 million of cash on its books, so the dividend, more than twice covered by earnings, appears secure.
Diversified Energy Company (LSE:DEC)
Share price 117.6p; mkt value £997m; PE ratio 6.3; dividend yield 12.0%
I’ve been a fan of Diversified Energy Co (LSE:DEC) for years, even before I met the CEO in 2020, and I make no apologies for backing this stock for a third year. It’s simply one of the best speculative income stocks around, although the consistency with which it returns cash to shareholders and delivers capital growth makes it less and less speculative. This gas and oil production business operates in the Appalachian Basin in the US, and boasts low-cost production, limited spending, high margins and clear commitment to the dividend.
Somero Enterprises (LSE:SOM)
Share price 414p; mkt value £238m; PE ratio 8.2; dividend yield 8.4%
Somero Enterprises Inc Ordinary Shares (LSE:SOM) is an American concrete screeding specialist and industry leader. Its core North America business remains buoyant, and the company has been able to pass on higher costs to customers. Inflation and supply issues have held it back, but the shares have recovered strongly since December. The dividend is paid in dollars, so UK investors receiving them in sterling benefit from the current weak pound. Somero increased the interim dividend, and the total payout is tipped to rise by 12%, underpinned by bullish forecasts for net cash of almost $45 million this year.
*All share prices are as at close of play on Friday 20 January
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