Stockwatch annual tips review: The best and worst of 2018

Some stocks have doubled, another succumbed to a takeover bid and one could still be a buy. Companies analyst Edmond Jackson also tells us what he'd do with this year's slackers.

What stands out in 2018 is a pattern of stocks soaring in the first half, then selling off in H2, which begs a market technical question about whether this represents a classic "blow-off" market top. Also, fundamentally, does the slide in financials, despite no change as yet in operating performance, portend change ahead – not simply Brexit-related but weakening confidence in Wall Street valuations, rising credit costs and a string of countries reporting zero to negative GDP.  

It's not unusual for successful stocks to show above-average volatility, but this year's performance is stark.  Here's a look at some of my analysis over the past year and  

Financials: Burford, Miton, Liontrust

Financial stocks tend to be seen as a geared play on the economy/markets, with momentum traders accentuating volatility.  I've drawn attention to smaller asset managers and IFA groups other than banks, and also selective insurers on fat dividend yields.  

Favourites have been specialty AIM-listed or small cap which are inherently more volatile, and there have been big swings.  Reporting strong progress, they tended to rally, especially from mid-2016 and topped out last September.

Litigation finance group Burford Capital (BUR) was up exactly 100% over this period, small cap specialist fund manager Miton Group (MGR) up 81% and Liontrust Asset Management (LIO) up 42%.  They've taken a beating in the second half of 2018, however, ceding roughly 50% of this year's advances. 

I'd like to think that's an over-reaction, and at least one fund manager has been reported buying seriously into Burford, which has just lately rebounded after a major non-dilutive funding for new law cases.  This financier claimed it benefited from the last recession – litigation rose – although fund managers are exposed to redemptions and clients sitting on their hands as markets fall. Variable fees according to the total value of funds under management are also a threat.  

I've made plain their operational gearing, them being a play on stockmarkets, so corrections aren't unsurprising.  Regarding these stocks, with a caveat about how Brexit will also be a crux for those UK/European-oriented: Hold.

Financial software: Fidessa acquired in £1.5 billion deal 

Rival bidders' pouncing on mid-cap Fidessa (FDSA), which works for portfolio managers, earlier this year, similarly begs a question if the asset management cycle may have turned.  Also, if market leaders get de-rated, then private equity will be watching and waiting, especially those from a currency background stronger than sterling.  

Not surprisingly then, it was Swiss and US-backed bidders who chased Fidessa's exit value up to £39.50 per share (including a dividend) last April, after the stock had traded volatile-sideways.  

I'd drawn attention several times in 2017 from £24.50 per share as Fidessa reported results ahead of expectations and was positioning well in the US to capture benefits of financial deregulation there.  Cash flow had trended at least twice earnings, enhancing takeover appeal.  

In the event of a Brexit chaos hitting sterling and equities, bear Fidessa in mind for more takeovers to emerge. 

Pubs/hotels: Young & Co

This £650 million AIM-listed brewer and pub chain Young & Co (YNGA) is important to mention, reflecting a dilemma about how loose monetary policy of the last decade has made it a lot harder to find defensive stocks.  

Buildings/land may now be overvalued, not just shares, and ultra-low interest rates have also promoted over-expansion of pub/restaurant capacity.  Most unusually this conservative share (despite its AIM listing) joined the 2018 ramp-up in those with higher-risk/reward, soaring from about £13.50 to £18.30 in the first nine months. It then de-rated to £14.50 currently, a level more in line with the recent years' trend-line and its fundamentals, similarly up over 7% this year.   

I've drawn attention to Young & Co as a portfolio building block since 600p in 2012, but questioned at 1,685p last June, whether a 28% rise in a pub stock this year – on a 25x price/earnings (PE), 50% premium to net assets and a 1% yield – was sustainable.  

Although forecasters expected a long hot summer, the rating appeared too exotic, hence my 'take profits' stance, which has borne out.  The duration of fine weather helped a 20% rise in profit/EPS for the six months to 1 October, on revenue up 9%, and management proclaims "one of the lowest levels of gearing in the sector, significant financial capacity for future investment and a strong pipeline of acquisition opportunities."  

The last recession also proved Young's south-east bias is resilient.  This time around I'm wary at the extent of industry capacity for eating/drinking out, so despite Young's reputation for a quality experience, I'd wait to see how consumer spending pans out rather than suggest it currently as a recession-resistant play.  Buy on weakness.

Losers: small caps and an outsourcer 

While I made amply clear the speculative "high risk/reward" tags on the following stocks, and about how a disciplined approach would be to await updates for more evidence, that they appeared on my radar at all implies I rather succumbed to 2018's risk-loving.  

It is pertinent to note how, if the UK does become seriously challenged by Brexit, then domestic small caps are most exposed.

Bonmarche: clothing retailer wilts

I drew attention to value retailer for over 50's women Bonmarche (BON) only recently. That came after firm interim results that showed good cash generation and £10.4 million cash in support of near-term dividends. However, I did also caution about high trade payables on the balance sheet, as if suppliers were being delayed, and Brexit uncertainties weighing.  

Look for the next trading update. but if there's a worthwhile business then the stance should be 'Add'.  That was kiboshed within a month by news of disastrous trading since Black Friday, such that underlying pre-tax profit was downgraded from £9.3 million consensus to a range of breakeven-to-£4 million loss for the year to end-March 2019.  

The stock has plunged from 82p to 37p, having traded above 300p in 2014-15. With even ASOS (ASC) compromised in the current environment, my doubts increase as to whether Bonmarche is in a niche market or the graveyard.  

Aside from the clothes' appeal, maybe over 50's women own as many clothes as they need, having tired of dumping them on charity shops?  Otherwise, management's claim about how trading conditions are "worse than the 2008/09 recession" is ominous generally.  'Sell' might be too late but for the time being: Avoid.

Fitronic: snakes and ladders

I drew attention to Filtronic (FTC) in September 2017 at 12p. The rationale was that the AIM-listed technology hardware group had interesting prospects for its ultra-wide band antennas in the 4G rollout – also 5G further out. But there was also the caveat about volatile financials that had also benefited from an R&D tax credit.  

Long-term, telecoms hardware is fast-moving, hence risky.  The stock more than doubled to 29p by last October but has since slumped to 6p as stockmarkets fell then came shock news about how management intends to write off the antenna investment, its principal customer having changed tack.  

While I made the risks plain, with hindsight I also succumbed to "risk-on" sentiment generally, having previously witnessed Filtronic's much bigger rise/slide in 1998-2000: the linking feature being technology that proves too erratic to be investable.  

So, either continue to hold for the next big idea - but which could take years – or sell when convenient for a tax loss.  Broadly, it exemplifies a late-cycle punt, so perhaps best to clean up: Sell. 

Kier Group: extends outsourcing woe

Another example of how I've warned assiduously of risks, yet still been intrigued, is this mid-cap construction and outsourcing services group Kier (KIE), where management made claims as to "future proofing".  

Events chiefly affirm this sector as an efficient destructor of capital and how debt can make things go from bad to worse – of relevance if 2019 manifests downturn after many plc's geared up in the low-interest rate years.  

Last January at 1,090p I said "'speculative buy' if you trust the directors, otherwise follow as a case-study in determining risk from accounts". Then, last September at 990p, "'speculative buy' albeit eyes open to risks".  

The stock is currently volatile at around 350p, well below the 409p-a-share rights issue that attracted only a 38% take-up, hence the majority of stock was left with the underwriters. Kier had sought £264 million to bolster a balance sheet that had £624 million net debt, as creditors tightened terms.  

Management is confident of its prospects for the year to end-June 2019, but has cautioned that the results will be second-half-weighted.  It's impossible to say currently that it's a Phoenix to recover in 2019 or heading for administration. Much depends on the trading environment.  For now: Avoid.   

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.