Interactive Investor

Stockwatch: my top share tips in 2023 and what I’ll do with them now

He made lots of great calls last year and correctly predicted a couple of company takeovers. Analyst Edmond Jackson talks through some of his memorable trading ideas and gives his latest rating for each of them.

22nd December 2023 10:18

by Edmond Jackson from interactive investor

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A four-point checkilst with ticks 600

Reviewing 2023 stock ideas, it appears “value” type situations have predominated, with only the occasional growth share.

It reflects where we are economically: stocks with a cyclical element generally sold off from last spring, reaching lows in October. Since November, pretty much everything has risen on hopes for serial interest rate cuts in 2024. Greed indices are back on high. And, as flotations of exciting businesses have largely dried up, any genuine growth stocks that do exist enjoy scarcity value.

This broadly explains a sideways-volatile trend of indices – whether FTSE 100, 250 or small-cap – hence frustration for investors watching their shares sink until the last six weeks. Only the AIM index has really fallen, down 11%, given it comprises riskier stocks which fell further before the turnaround in sentiment.

M&A proves industry is exploiting caution

Takeovers started to happen, especially among small-caps, as if trade buyers reckon valuations offer long-term value, while bids come at a time when boards and shareholders are liable to capitulate to any significant premium.

Promptly last January, after I noticed vigorous stake-building in funerals provider Dignity at 370p to rate it “buy”, the company was taken over at 550p a share. This had a feeling of being arranged with a friendly buyer given the board warned of higher costs ahead rather than make any defence. Why take control then if a situation is souring?

I did not cover sausage-skin maker Devro, but after it was bid for, this focused my attention on retailer Hotel Chocolat (LSE:HOTC) as a “buy” at 147p. Despite struggling overseas, it always seemed to me that its chocoholics’ fan club meant it would ultimately be acquired.

This happened last November when Mars offered 370p a share, a whopping 170% premium to market price. Such a multinational can integrate the brand into its marketing and achieve economies of scale.

Value can work well if timing is good

Value investing typically involves a contrarian approach versus jaundiced sentiment.

The insurance sector for example has offered opportunities after a tough time for motor especially amid rising claims. After Direct Line Insurance Group (LSE:DLG) made a long descent from 333p in early 2021, at 158p last March I made a “buy” case given the market could start to price in recovery from the point when “at least the news is not getting any worse”.

Showing how timing can be tricky, the chart then put in a “double bottom” around 136p in March and June, then advanced to 195p after a third-quarter update in early November cited a 28% advance in gross written premium. It was 37% like-for-like on the previously problematic motor side, and there was also good growth also in home and commercial.

The rally coincided with the general market rise, but looks to mark a turning point for Direct Line as the work of a new CEO from last January starts to show through. Consensus estimate for 2024 anticipates a near doubling of net profit and earnings per share (EPS), such that the forward price/earnings (PE) ratio would be around 11x. And, with the dividend targeted to partly recover to 14.3p, there is a 7.5% prospective yield with the stock currently 190p. A very strong cash flow profile lends confidence also. Insurance is highly competitive but, assuming the turnaround gains traction, Direct Line rates a strong “hold”.

Also in March, I argued a “buy” case at 50p for Costain (LSE:COST) a small-cap infrastructure engineering services group seemingly on a forward PE of just 4x. Low margins and occasional upsets help explain that. Yet management proclaimed it can raise margin. For a sub-£140 million company making around £1.3 billion revenue, an improvement from 2.5% in 2022 to say 3.5% would imply £45 million of operating profit.

The stock has risen to 65p, or 5.6 times consensus 2024 earnings, with the prospective yield being just 2% albeit covered 8x. With both political parties likely to sustain infrastructure spending the context looks fair for Costain’s recovery to evolve, hence “hold”.

Housebuilder and land trader MJ Gleeson (LSE:GLE) was a small-cap “buy” idea at 397p in September, which has rallied to 480p amid hopes for lower interest rates. I liked Gleeson’s 20% discount to net tangible asset value of 477p a share, plus its strategic emphasis on affordable homes making it less risky than some other builders.

In a long-term context, the stock has mean-reverted back to where it was in mid-2015 (before it doubled by end-2019 then re-traced). With mortgage rates now set to fall it makes Gleeson another value-based “hold”.

Travel stocks have also rebounded

Last September, I noted Jet2 (LSE:JET2), easyJet (LSE:EZJ) and On The Beach Group (LSE:OTB) as potentially at an inflection point – all on forward PE’s around 8x even if dividend prospects were only starting to resume, the best being easyJet on a 4% yield.

Despite consumer spending constraints, travel remains a high priority for many people and these lower-priced operators could also benefit from trading down.

Jet2 and easyJet have risen 18% and 14% respectively but, as a more sensitive small-cap, On The Beach is up 53%.

Hopefully, you see how despite varying industries – insurance to construction to travel – similar factors of judgement are involved with a contrarian-value approach, although timing still leaves you at the behest of crowd sentiment.

Genuine growth criteria enjoys premium for scarcity     

Despite seemingly forever being on around 30 times forward earnings and a sub-1% yield, telecoms billing software group Cerillion (LSE:CER) has kept upgrading prospects such that its stock is up 33% this year. Expansion of full-fibre broadband and 5G has offered an attractive context but, as ever with highly rated stocks, you need to be ahead of expectations that the growth rate could slow.

Having first drawn attention as a “buy” at 245p in April 2020, three years later I therefore suggested not to push luck for a 30 times PE to persist. As Cerillion edged over 1,200p, I suggested considering taking some profits within a long-term “hold” stance.

But despite a slide to near 1,000p by last October, the stock has rallied to 1,610p and a 33x PE – trading around 1,500p even while I was writing this column. It has a feeling of froth given the impressive September-end annual results on 20 November. I therefore maintain to be locking in gains but not outright “sell”.

Value-to-growth is potentially the best find

I am uneasy citing the old Sports Direct as an example of a shift in value to growth, not least because majority shareholder Mike Ashley installed his son-in-law as CEO of the renamed group. But it helps to illustrate the concept.

Last June at 695p, I thought mid-cap Frasers Group (LSE:FRAS) merited “buy” on a modest forward PE of nine times. Yet there was plenty of historic evidence suggesting people would turn to keep-fit activities in straitened times, partly to improve appearance. Offering value-based kit helps. Nowadays, this group is a more diversified clothing, shoes and accessories retailer, yet its strong cash flow profile should continue to support acquisitions and its chart looked potentially at a trough.

It has since rallied 35% to a 940p all-time high, with 7 December interims to 29 October showing retail profits up 26%, which Frasers attributes to the “elevation” strategy to achieve the best consumer experience.

No dividend reflects Ashley’s focus on capital growth, for which the group looks well-placed on a forward PE of just 10 times.

If management is adept in a cost-conscious environment, it could even cut a growth record, hence the stock rates “hold” given underlying momentum makes it look cheap.

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

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.

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