These growth and contrarian stocks are among the winners in 2021, but what does our companies analyst think of the now?
This week, I examine lessons from strong performers among stocks I have analysed this year; and those more recently on a roller-coaster ride.
Two key upshots from the winners:
First, both “growth/momentum” and “value/contrarian” styles can work well.
Second, previous years’ winners may continue to outperform – a minority of super-stocks can be the best contributors to long-term portfolio performance.
Liontrust Asset Management
Demand has remained keen for financial asset management, bolstered by waves of monetary stimulus.
I first drew attention to Liontrust (LSE:LIO) at 110p in October 2012. Notably, a macro theme drove my interest: “Quantitative easing has provided an excellent environment for asset gathering, boosting shares while debauching cash value.” Liontrust had also achieved a ninth successive quarter of positive inflows, a testament to its management and marketing.
The stock’s testing £25 last August affirms the benefit of strong macro drivers besides company-specific criteria. There is also virtue in asset management’s business model: once fixed costs are covered, salaries/bonuses may increase but asset growth can still substantially boost shareholder value.
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The big risk is being tied to stock market sentiment given fees reflect the value of funds under management. Liontrust drifted to £20 by last October and has since traded sideways as central banks begin to tackle inflation with interest rate rises. Take your view on whether they succeed and how £1.3 billion Liontrust fares in 2022. At £20.80, a “hold” stance is a necessary fudge.
Tritax Big Box REIT and Tritax Eurobox
Another secular trend is major new warehouse logistics serving the digital economy.
Tritax Big Box (LSE:BBOX) was a steady performer after I drew attention at 100p post-flotation at end-2013. It also pays out annual dividends of over 5p a share. By 2019 it had tested 160p and its chart has strengthened since Covid boosted the digital economy.
At 240p currently, the shares are just off a recent 242p all-time high. This represents a premium to its underlying net asset value per share around 200p, a trait not uncommon when real estate investing concepts become fashionable. This one likely still has mileage, but take care lest exuberance in equities abates as interest rates rise. Again, a “hold” stance seems fair but fudges it.
This explains why, from last May, I drew attention to Tritax EuroBox (LSE:BOXE) at 106p. A capitalisation of around £650 million stands better chance of growth than near £6 billion for Big Box REIT, which needs bigger or more frequent acquisitions. Offering continental European exposure, the stock rose to over 120p by August, though has since eased to 116p but at a slight premium to 115p net tangible asset value. I retain a “buy” stance for patient returns including a near 5% yield.
Small-cap growth: Brickability and Cake Box Holdings
Two more long-term lessons, and especially for small-cap: virtue in backing an intelligent acquisitions strategy and a novel roll-out concept.
Brickability (LSE:BRCK) was a well-timed flotation in August 2019 to capitalise on buoyant house building. A strategy to consolidate smaller building materials’ firms, from a base in bricks and roofing products, had logic. Pursuing its aim to become the UK’s largest building materials supplier, Brickability could itself get taken over.
I first rated it a “buy” in September 2020 at 45p versus a 65p flotation price. The stock began to rally from that November as Covid vaccines raised confidence. At 102p last June, I tempered that stance to “hold”, and the price dipped to 89p in July before recovering to 107p> It’s currently 101p. On a forward price/earnings (PE) ratio towards 12x, “hold” remains a fair rating if interest rate rises temper house building somewhat.
Cake Box Holdings (LSE:CBOX) franchises egg-free cream cakes’ retail outlets, making its money also on supply of cakes and ingredients for in-store finishing. I first drew attention as a “buy” in June 2019 at 170p, but the stock only motored from March 2020. It’s unclear whether that reflected people treating themselves during Covid, or monetary policy boosting growth stocks, although Cake Box has quite consistently traded on a forward PE around 20x.
As it rose to 261p last April and 330p last July, I tempered my stance to “hold”, yet the price carried on to 422p barely a month ago, on a 12-month forward PE around 28x. It has dropped to 358p after the CEO sold £10.5 million worth at 350p. With a modest 174 franchise stores and kiosks being trialled, underlying momentum could last a while yet. “Hold” if you have alertness to sell before the growth rate slows.
BT Group and Marks & Spencer exemplify contrarian value
At 102p in November 2020, I thought the risk/reward profile on BT Group (LSE:BT.A) favoured upside given an apparent discount to net assets and an aggressive cost savings programme that supported a promise to restore a 7.7p, progressive dividend policy.
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Roll-out of full-fibre broadband was also a bullish aspect of BT’s operational narrative, which attracted telecoms investment group Altice to buy a total 18% of BT this year.
The stock reached 202p last June then fell to 135p by October, currently 170p as takeover speculation continues. I doubt the Johnson government would give further ammo to its critics, however, allowing a foreign takeover of BT. On a forward PE around 8x and yielding near 5%, the stock looks a firm “hold”.
Marks & Spencer (LSE:MKS) matured into a 66% advance over 2021 since I argued a “buy” case at 88p in March 2020. It was then at a 30% discount to net tangible assets of 137p a share and had a new distribution agreement with Ocado effective from September 2020. Having rallied over 170p mid-2021, the stock advanced to 245p earlier this month after evidence of turnaround in the clothing and home side at November’s interim results. At 228p, a forward PE around 12x remains modest to fair, hence “hold”.
U & I Group’s discount to NAV helped attract a buyer
Last July, I was intrigued by a 44% discount to net assets for this property regeneration stock UAI, previously Development Securities. This reflected poor financial results with big write-downs, however a new board and management was simplifying the portfolio and cutting costs. Urban regeneration aligned with government policy, the balance sheet was robust and £42 million net cash had been generated from operations.
“Discount to assets plus a cutting-edge business plan” was affirmed once again for stock-picking: within four months Land Securities (LSE:LAND) offered 149p a share, a circa 20% premium to 125p net assets and 62% to my “buy” stance at 92p.
Smaller motor dealers bounced from low ratings relative to NAV
Besides keen demand for new and used cars, Vertu’s after-sales service side represented 43% of profit on a 50% margin and Marshalls was similarly benefiting.
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Forward PE’s were just 6x and 9x respectively, and Vertu also traded at net tangible asset value.
While I thought Vertu was the sector’s chief pick and it rose to 70p - currently 68p - Marshall is another example of an acquirer exploiting modest valuation – with a current takeover at 400p a share.
After serial profit upgrades, a “hold” stance seems fair for Vertu on a forward PE possibly just 8x; however, motor dealers need close attention.
Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.
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