Each week, a professional investor tells us where he'd put his money. This week: Alasdair McKinnon of the Scottish Investment Trust.
"I made my money by selling too soon." Wise words indeed from US financier Bernard Baruch; timing is one of the great investment challenges. After a year of record highs for global stockmarkets, we can't claim to know whether there will be any major upsets in 2018, but we do know that there is no room for complacency.
Our contrarian approach attempts to avoid over-excitement currently very apparent in the markets, as demonstrated by the hype surrounding cryptocurrencies such as bitcoin and the tech sector Fang stocks (Facebook, Amazon, Netflix and Google). However, we're less interested in whether particular asset classes are overly elevated than in avoiding the market's increasingly complacent attitude to risk and reward.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
In this context, and with a view to the inevitable cycles inherent in both industry earnings and equity valuations, we search for opportunities for strong long-term returns, preferring to invest in companies where expectations are low and modest progress can bring outsized rewards. It's an approach that can require patience as, although providing ample room for recovery, these investments are often deeply unfashionable. We see some interesting prospects in the retail and oil sectors, and below I've listed three of our contrarian "ugly duckling" UK holdings.
The internet is viewed as a great threat to physical retailers, but not all shops will fall by the wayside. We believe that enduring British brand Marks & Spencer (LSE: MKS) has the wherewithal to survive and thrive. M&S is out of favour because of structural challenges from online shopping, a perceived threat to the UK consumer from Brexit and a clothing segment that has provided successive disappointments. However, credible new leadership is making progress with a sensible turnaround strategy. Valued for failure, expectations are low and the upside is attractive, with the bonus of a well-covered 6% dividend yield.
Having over-earned for many years, Tesco (LSE: TSCO) has had to face the challenge of both online shopping trends and discounter competition in recent times, leaving them with excess space and shrinking margins. Nonetheless, new leadership has made great progress in lifting this fallen brand back on to the road to recovery. The deal to acquire food wholesaler Booker will benefit Tesco across the grocery markets. We believe that while profit margins will not regain their historic highs, they can return to 3%-4% and that the shares are priced for an overly pessimistic future.
The oil majors have been out of favour over fears that the industry's supply and demand balance will be disrupted by a glut of US shale oil, impotent restrictions from oil cartel Opec, and the growing popularity of electric vehicles. We are less gloomy on supply and do not believe that the world's reliance on oil can change in the foreseeable future. Royal Dutch Shell (LSE: RDSB) is now structured for a low-price environment with notable leverage to upside in the oil price. A rejuvenated balance sheet has also allowed it to offer a cash dividend yield of 6%.
-
How to profit from rising food prices: which stocks should you invest in?Tips Food prices are rising – we look at the stocks to avoid and the one to invest in this sector.
-
Tesco looks well-placed to ride out the cost of living crisis – investors take noteAnalysis Surging inflation is bad news for retailers. But supermarket giant Tesco looks better placed to cope than most, says Rupert Hargreaves.
-
Tesco sells its retail subsidiary in Thailand and Malaysia for £8bnNews Tesco has agreed to sell its southeast Asian operations to Thai conglomerate Charoen Pokphand for £8.2bn in cash.
-
Tesco should keep its Asian assetsOpinion The £7bn that Tesco could get for its Tesco Lotus business in Asia looks enticing. But holding on to it would be smarter, says Matthew Lynn.
-
Tesco cashes out of the mortgage businessFeatures Tesco Bank has left the mortgage market by selling its £3.7bn loan book. Its 23,000 customers will be moved to the Halifax, a subsidiary of Lloyds.
-
Share tips of the weekFeatures MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
-
Tesco wields the axeFeatures Britain’s biggest supermarket is cutting back on staff and fresh food. Will the move prove counterproductive? Matthew Partridge reports.
-
If you'd invested in: Tesco and Associated British FoodsFeatures Tesco has seen its market value rise almost 50% in a year, while AB Foods has seen shares slide despite a rise in profits.
