How our tips fared in 2013

Phil Oakley looks at where we got it right, were too cautious, or just downright wrong.

It’s been a pretty good year for the stock market. With interest rates staying low, money-printing by central banks continuing, and lots of companies still growing their profits, the stock-market bulls have continued to hold the upper hand over the pessimists.

In Britain the FTSE 250 has again done much better than the FTSE 100 in price terms. As of 20 December the mid-cap index had gone up by 26.3%, compared with just 11.6% for the index of bigger companies. It adds further weight to the theory that ‘elephants don’t gallop’, and that while investing in big companies might be fine for steady dividend income, big capital gains can be harder to come by.

As long as the value of the FTSE 100 continues to be dominated by five to ten very big companies (which account for nearly 40% of its value) and weighed down by cyclical sectors such as mining, the index is likely to lag the more dynamic FTSE 250.

Over in the US the S&P 500 has had a stellar year, hitting record highs, climbing by nearly 27% to 19 December. That’s despite the fact that for a while now, the US stock market has on many measures looked expensive when compared with profits.

Investors have been prepared to pay very high multiples of profits (high price/earnings ratios) for quality companies. For the S&P 500 to maintain this upwards march, you have to believe that this will remain the case, or that growth in company profits will accelerate.

So what about this year’s tips? Every week we focus on one company in detail while also tipping a riskier share that has fallen on hard times (our ‘gamble of the week’). It’s time to see where we got it right (or lucky), where we were too cautious, and where we got it downright wrong. There’s not enough space to talk about all the tips, but we’ll cover the most significant ones.

The winners

Paper and packaging company DS Smith (LSE: SMDS) has been our best tip of the year. We tipped it in April, as we liked its promise of strong profits growth and good cash flow, combined with a reasonable valuation. It hasn’t disappointed.

The company’s merger with SCA is going well and costs are being cut. The company is bullish on its potential to take a bigger slice of the European packaging market, while profits are still expected to grow strongly. The shares are still a buy.

We continue to believe that in many areas UK house prices are too expensive. But with its Help to Buy scheme, the government is intent on supporting the market. That’s been great news for housebuilders like Redrow (LSE: RDW). With lenders putting money in buyers’ pockets, demand for houses is increasing faster than supply and prices are going up.

Despite the blustering of Labour leader Ed Miliband and the threat of taxing land banks, the builders are sitting pretty, having bought a lot of land at the bottom of the market. The shares are risky, but expect them to keep rising in 2014.

Sometimes you can be too careful

In 2012 we were too cautious in general. Last year we were less so, but there were still some shares that in hindsight could have been bought where we said hold or avoid. One is BT (LSE: BT.A) – it’s been a great performer in 2013.

Huge investments in fibre-optic broad- band and TV sport look capable of transforming the company’s prospects. Instead of growing profits by cutting costs, it seems there’s a good chance the sales could start growing again.

In TV and broadband BT is now a very strong competitor to BSkyB (LSE: BSY) and well placed to keep hold of existing customers while attracting new ones. With lots of free cash flow and good dividend growth potential, BT shares are a long-term buy.

While it remains difficult to understand what’s going on with bank balance sheets, Lloyds (LSE: LLOY) has a fair wind behind it. Not least is the fact that its biggest shareholder – the government – is looking to boost house prices and thus improve the collateral behind many of Lloyds’ mortgage loans.

Profits are rising and there’s the prospect of some chunky dividends in the next few years. With a future flotation of the government’s stake in the offing, there’s plenty of support for the shares in the City. So we now see the shares as a risky punt.

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The howlers

And then, of course, there were the shares we suggested buying that just didn’t work out. Bookmaker Ladbrokes (LSE: LAD) continues to struggle with building a decent digital business for customers who want to bet over the internet. With little sign that it is getting this right, we’d avoid the shares.

Clothing retailers have been hammered during the last few weeks of the year as they struggle to shift stock, and have resorted to offering steep discounts. This will weigh on profits, but perhaps the share-price falls have been overdone.

Debenhams (LSE: DEB) has decent retailing skills and the shares might still be worth a punt. Another casualty of electioneering, shares in utility group SSE (LSE: SSE) have been falling since Ed Miliband’s threat to freeze energy prices.

This is clearly a risk, but SSE has a well-balanced energy business with power networks and power stations, as well as a retail business. The 6.5% yield should grow in line with inflation for the next few years. Stick with it.

The gambles

The ‘gamble of the week’ section tries to identify a share that is either cheap or has fallen out of favour but has the scope to recover. This kind of strategy has worked well in 2013, with some big winners. We tipped 35 gambles this year and only six lost money – though it’s worth pointing out that this is against the backdrop of a rising market.

European electrical retailer Darty (LSE: DRTY) has been a stunning performer as investors have bought into its turnaround plan. It’s been getting out of loss-making countries in Europe and focusing on France, Belgium and Holland, where it can make money. However, the shares look up with events – hold if you’ve got them, but don’t buy in now.

STV (LSE: STVG) shares looked very cheap in March and had lagged behind the surge seen in the shares of peer ITV. But since then they have been significantly re-rated higher as the broadcaster’s strategy of growing digital and programming revenues is motoring along nicely, while advertising income is growing. The shares still look good value on less than nine times 2014 earnings.

The same can be said for haulage company Wincanton (LSE: WIN). It has been successful at cutting costs, reducing debt, and has begun to tackle its troublesome pension fund. At the same time it’s been hanging on to contracts and winning new ones. On nine times next year’s earnings, there may still be further to go for with this one.

Structural steel company Severfield Rowen (LSE: SFR) has had a torrid time due to a weak British construction market and some bad contracts. It needed to ask shareholders for more money to keep itself on an even keel, but since then the shares have done well. The company’s profits are very sensitive to changes in sales. A pick up in UK construction could see profits grow quickly. The shares are still worth a punt.

The value traps

A couple of gambles have turned out disastrously – mainly because they are bad businesses that are not going to recover quickly and may get worse. In other words, the shares were cheap for a reason.

Buying shares in these kinds of companies is what is known as a ‘value trap’, which often leads to losses rather than profits. The key to a good gamble, of course, is being able to tell the difference more often than not – as we have done.

The best buys

Company Date Price then Price 20 Dec Change What we think now
DS Smith 12/04/2013 211p 324p 53.55% Buy
Redrow 07/06/2013 224p 299p 33.48% Still a punt
Mitchells & Butlers 22/02/2013 341p 436p 27.86% Hold
Stagecoach 26/04/2013 297p 376p 26.60% Hold
Google 19/07/2013 896p 1,086p 21.21% Hold

Too cautious

Company Date Price then Price 20 Dec Change What we think now
BT 11/01/2013 244p 374p 53.28% Buy
Apple 01/02/2013 450p 544p 20.89% Hold
Aviva 15/03/2013 322p 436p 35.40% Hold
Lloyds 10/05/2013 54.75p 77p 40.64% Risky punt
Talk Talk 17/05/2013 217 294 35.48% Hold

The howlers

Company Date Price then Price 20 Dec Change What we think now
Ladbrokes 02/08/2013 207p 171p -17.39% Avoid
Debenhams 01/03/2013 95p 79p -16.84% Speculative buy
SSE 21/06/2013 1,525p 1,369p -10.23% Buy for dividends

The gambles

Company Date Price then Price 20 Dec Change What we think now
Darty 22/03/2013 41.75p 107.5p 157.49% Hold
STV 15/03/2013 144p 308p 113.89% Buy
Wincanton 19/07/2013 66p 127p 92.42% Buy
Severfield-Rowen 01/02/2013 39.5p* 61.75p 56.33% Buy
Britvic 26/04/2013 445p 688p 54.61% Hold
*price adjusted for rights issue

Lessons learnt: don’t buy bad businesses

Company Date Price then Price 20 Dec Change What we think now
Office2Office 08/02/2013 95p 31p -67.37% Avoid
Petropavlovsk 15/02/2013 345p 69.8p -79.77% Avoid
Chemring 22/02/2013 285p 213p -25.26% Avoid
Serco 06/09/2013 548p 472p -13.87% Avoid

 

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