Interactive Investor

Stockwatch review 2022: four big winners, banks and housebuilders

23rd December 2022 11:08

by Edmond Jackson from interactive investor

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Analyst Edmond Jackson discusses what he’d do now with some of this year’s winning stocks. He does the same with the losers and also shares a lesson for investing as economic downturn grips. 

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Two key matters emerge from a review of my ideas through 2022 tat are relevant going forward.

First, a few relative stalwarts are likely to retain interest from defensive investors should global recession ensue, which seems likely in the wake of concerted interest rate rises. 

Second, various cyclical stocks appear cheap – especially on yield criteria – but what if trading statements deteriorate? 

Stalwarts for a long hard UK recession 


Healthcare is traditionally defensive given public spending commitments smooth much risk of economic downturn. AstraZeneca (LSE:AZN) is also well-positioned demographically: its progress in harder-to-treat cancers suits the need of an ageing population in the developed world. 

Having initially argued a “buy” case at 7,100p in February 2021 – with over half of revenues derived from faster-growing new medicines – announcements this year have reflected delivery from R&D and seem likely to continue. 

I have re-iterated a “buy” stance for example at 9,000p last February and 9,800p in October. The stock has not been without volatility, but still has risen over 30% in the course of 2022 – where at around 11,150p it enjoys a growth rating on a 19x forward price/earnings (PE) ratio and a modest 2.2% yield. If markets turn jittery again, there may be another buying opportunity. At this level: Hold.

BAE Systems 

Russia’s invasion of Ukraine re-rated defence stocks by around 20% from late February, yet it appeared to me that possibly a decade of higher defence spending beckoned. European leaders rushed to make commitments to support Volodymyr Zelensky, and President Joe Biden re-iterated US support of Nato, also facing up to China in Asia-Pacific. 

This is why I favoured BAE Systems (LSE:BA.) given a spread of activities as UK defence sector leader. In March, at 735p, it traded on a forward PE of 14.5x with a prospective dividend yield over 3.5% around twice covered by earnings – or more like 2.4x free cash flow – which still looked attractive for a long-term growth industry. 

My suggestion remains to average into BAE and build a position to hold possibly for five years or more. Raised forecasts mean that at around 840p currently its prospective yield is around 3.3% and the PE only edged up slightly to 14.7x. The wild-card disruptor would be President Putin departing, otherwise there seems little chance of BAE’s chart deteriorating. Buy.

British American Tobacco

Despite its unethical status, British American Tobacco (LSE:BATS) is seen as a relatively reliable income stock due to very strong cash flows. Lower consumer discretionary spending may temper demand for cigarettes yet BAT is well-positioned as global leader in vaping. 

My end-2021 “buy” idea at 2,800p enjoyed a near 30% re-rating, helped by rotation from growth into value-stocks. This has eased to an 18% annual gain at 3,300p, however, amid a backlash against younger people vaping. 

Taking out £1.5 billion costs annualised should help sustain profits but this now appears primarily a yield stock – offering 7.4% twice covered by earnings, if consensus is fair. Hold. 

H&T Group  

This is the UK’s largest pawnbroker, where a 74% year-on-year rise in its pledge book in July prompted me to a “buy” case at 333p. H&T Group (LSE:HAT) carried on upwards to test 500p. Currently at 480p, the forward PE is still only 8x and the yield close to 5% - assuming consensus forecasts.  

At end-September, near £17 million was raised at 425p incurring 10% dilution, to further fund growth in the pledge book and store estate. Octopus Investments has continued to raise its stake, near 11.5% as of early November, versus 6.5% in early October.  

There is a risk of lower jewellery sales taking some shine off pawnbroking profits, yet combining such activities makes long-term strategic sense. If you reckon tough times will last: Buy. 

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Is it premature to engage cyclical stocks? 

In May, as housebuilder shares fell, I examined MJ Gleeson (LSE:GLE) after its CEO and a non-executive director bought £90,000 worth of shares at around 600p. Specialising in high-quality low-cost homes appeared quite defensive given a fundamental UK shortage of such, also potential to attract home buyers adjusting down their hopes. 

Such a price implied a modest forward PE of 9x, and I did note that the ratio of house prices to average incomes implied holding back on buying housebuilder equities. Over 80 years, it was only during the early 2000’s and more recently that this ratio escaped a 4x to 7x range, yet ultra-low interest rates had pushed it to a record 9x. 

I should have stayed with my top-down view – to let trading statements worsen – than suggest averaging into the stock. Gleeson’s price has fallen steadily to around 350p, despite record revenue and profits for the year to 30 June. The market has correctly anticipated a change in the story – reservation rates down and cancellation rates up – although Gleeson proclaimed its average selling prices were 9% higher year-on-year, and a couple on the National Living Wage can still afford a Gleeson home. 

The stock trades at a 25% discount to net tangible asset value, hence some margin of safety.

I proceeded to examine volume housebuilder Persimmon (LSE:PSN) at 2,100p when 35% down year-on year from May 2021. It had improved its operating margin to 28%, helped by “vertical integration” – of owning materials suppliers. 

While making clear that the dividend would still be affected by home sales rates and prices, I was premature to conclude “buy” – even "as a starter position, to add to or ditch according to the housing market in the next two years.” 

An 8 November update cited sales 20% higher and nearly £700 million of cash, despite overall land spend up nearly 60% to £590 million. Yet guidance was dropped and “a deterioration in average selling prices will impact 2023 margins.” 

The stock fell as low as 1,140p in October and is currently around 1,215p. Net profit estimates for 2023 have been slashed to around £430 million, implying a PE just over 8x – also 1.3x cover for a 114p dividend per share, representing a 9.4% yield.   

You may recognise the dilemma: once-bitten, twice shy, when housebuilders may now offer genuine long-term value. 

Meanwhile, UK bank equities have generally recovered from the autumn rout, as higher interest rates improve their business models. Yet they are also exposed to lower mortgage demand and defaults.

Metro Bank (LSE:MTRO) soared nearly 50% from 70p early last November and, while I backed it with a “buy” case at 80p that month, I also noted how retail mortgages constituted 50% of its lending book. Around 120p, I think there are wider reasons to hang on to Metro but shareholders in all banks need to be aware of mortgage exposure. 

An easy option would be to concede to a mistake on housebuilders and revert to a rule-based approach that says “wait on cyclicals” at the early stage of a downturn. Otherwise, one is tempted into the evils of averaging down. 

Yet avoiding/selling cyclicals now cedes both income and takeover potential - for example, Metro Bank had a takeover approach a year ago – and one will never time the trough. 

It leaves me in an invidious position of “Hold” for all three such stocks; a compromise I dislike, but I have already erred somewhat by departing modestly from a macro stance. 

Hopefully, such vicarious experience is useful to you as economic downturn grips. 

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

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