Three stocks going cheap
Many investors hold on to shares in good-quality businesses that may give a feeling of comfort because of their size or perceived quality, but which do not really lift a portfolio's performance. Here, professional investor Chris White picks three stocks that he would buy today, and which he believes have plenty of potential for growth.
Each week, aprofessional investor tells MoneyWeek where he'd put his money now. This week: Chris White, senoir investment manger, Premier Asset Management.
A common mistake for fund managers is holding on to shares in good-quality businesses, but where the outlook is a bit dull. These are shares that may not actually have significant upside potential. They may give fund managers a feeling of comfort due to their size or perceived quality, but they will not really achieve the necessary positive impact on a portfolio's performance.
You can help yourself to kick this habit by asking yourself: What is the upside on the stock and would I buy this stock today?' If the answer is no', then you might want to consider looking for alternative opportunities. Three stocks that I would buy today, which I believe have material upside potential, are Imperial Tobacco, Babcock and Tullett Prebon.
Imperial Tobacco (LSE: IMT) is my favourite income stock on a risk/reward basis. Last financial year, the company grew its earnings by 10% in a tough macro-economic environment in its major markets this was a particularly impressive performance, highlighting the defensive attractions of the company and the sector. The shares have underperformed the stockmarket for some time after the acquisition of Altadis, which left Imperial highly indebted. It is possible that we may see a buy-back from Imperial over the next 12 months.
The estimated dividend yield for 2011 is 5%, with earnings and dividend forecast to grow at 10%. Furthermore, as noted, these returns could be enhanced by a share buy-back. This is a stable consumer goods company that looks highly attractive.
My second pick is Babcock (LSE: BAB). The government's austerity programme has worried investors and no more so than in the area of defence. Babcock is a major supplier of outsourced services to the Ministry of Defence and recently bought one of its largest competitors, VT Group.
The recent results suggested that the company is trading well and that the acquisition of VT was bedding in nicely. Upon meeting with the company and following further research, it would appear that Babcock is in a very strong position to pick up further contracts in a number of areas as further outsourcing takes place. Strong cash generation has seen debt fall sharply and we would expect this to be reduced still further by disposals. After a period of underperformance, the shares look well placed to have a strong year as they appear very cheap relative to their peer group.
Finally, with quantitative easing potentially ending in America, and interest rates rising in many countries around the world, I have selected a stock that will benefit from increased market volatility in foreign-exchange rates and interest rates as we go through the year. Tullett Prebon (LSE: TLPR) is a cheaply-rated, cash-rich, inter-dealer broker that trades between banks in foreign-exchange rates, interest rates and other derivatives.
If we are right about increased volatility, the shares will perform well. The company was also recently rumoured to be in talks about a merger with a major competitor. This would be the icing on the cake, as there would be considerable merit in such a transaction. All three companies we would happily buy today and could easily trade 20% higher without looking expensive.