Seeking out solid stocks in stormy times

Investment analyst John Goodall selects three reliable and cheap shares to tuck away in your portfolio.

Each week, a professional investor tells us where he'd put his money. This week: John Goodall, research analyst at WH Ireland, selects three reliable and cheap shares.

Equity markets in the developed world rebounded in the second quarter, leaving the FTSE 100 broadly flat for the year to date. Investors will have benefited from dividend yields, which have added around 2.4% to the index's performance. Emerging markets, however, have struggled owing to a strong US dollar, which has reduced liquidity and hampered lending.

The Chinese equity market has reached a three-year low amid fears of a trade war. Amid this uncertain backdrop, investors should concentrate on companies with solid track records and prospects that are trading at attractive valuations. The following firms offer capital preservation, growth and income.

A solid dividend grower

Diploma (LSE: DPLM) is a high-quality niche distributor of technical components, operating in life sciences, seals and controls. It provides products in high-growth sectors that are indispensable to customers, while aftermarket services such as repair and maintenance foster customer loyalty. It has a strong track record: dividend and free cashflow growth have compounded at around 13% a year over the last decade.

Selective bolt-on acquisitions, funded almost entirely by free cashflow, have also enabled Diploma to grow. Over the last three years, the group has invested £90m in takeovers, contributing to over £70m of group revenues in 2017, 15% of the overall figure. With a "terminal" growth rate (the estimated potential annual rate over the extremely long term) priced into the current valuation, compared with a current underlying growth of 7%, we believe there is scope for further upside.

A discounted real-estate play

We see value in British Land (LSE: BLND), which trades at an unwarranted 35% discount to net asset value (NAV). Retail property, which accounts for half of group assets, is undergoing a period of structural change with online competition threatening the traditional high street.

British Land is well placed, however, having sold £2.3bn of retail property in four years to focus on quality, well-located assets and those with mixed-use potential. This is paying off. Over the last two years, its assets have significantly outperformed in terms of footfall and sales. Moreover, the sector's development plans for London offices have been scaled back recently, but British Land has benefited from the lower supply as it has kept investing. The overall portfolio is also well placed to benefit from Crossrail, given that 35% of assets (£4.6bn) are near its stations.

Buy in before a break-up

Whitbread (LSE: WTB) has said it will demerge Costa within the next two years. Premier Inn and Costa are deemed better long-term prospects as separate businesses. We see upside in the current valuation of the single entity. In the UK, Costa has doubled outlets in the last six years to over 2,400. Growth has been complemented by the rollout of Costa Express machines. Future growth will be driven by the overseas business.

Premier Inn keeps expanding in the UK and is aiming for 85,000 hotel rooms by 2020. It launched in Germany in 2016 and intends to operate 31 hotels across 15 cities by 2021. Earnings per share of around 300p looks achievable by 2020, making the shares good value for long-term investors.

Recommended

Buy into the “contrarian” appeal of US growth stocks
Investment trusts

Buy into the “contrarian” appeal of US growth stocks

Investors should ignore the shift towards value stocks, says Max King, and stick with fast-growing American tech stocks. Here are two of the best inve…
26 Jan 2021
Three clean energy stocks for your portfolio
Share tips

Three clean energy stocks for your portfolio

Professional investor Christian Roessing of the Pictet Clean Energy Fund highlights of his three favourite stocks at the forefront of the clean energy…
25 Jan 2021
Eternal growth: how to invest in the future of the drinks industry
Share tips

Eternal growth: how to invest in the future of the drinks industry

Humans have been dabbling in tasty beverages for millennia. Jonathan Compton assesses the key trends in the sector and recommends seven hard- and soft…
22 Jan 2021
Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
22 Jan 2021

Most Popular

The FTSE 100 is set for a makeover with an influx of new tech stocks
UK stockmarkets

The FTSE 100 is set for a makeover with an influx of new tech stocks

The FTSE 100 – the dullest index in the world – is about to reinvent itself as a host of new firms list on the market. The change is long overdue, say…
24 Jan 2021
Why we won’t see a house-price crash in 2021
House prices

Why we won’t see a house-price crash in 2021

Lockdown sent house prices berserk as cooped up home-workers fled for bigger properties in the country. And while they won’t rise quite as much this y…
18 Jan 2021
Think Tesla is a bubble? This might be the best way to bet on it bursting
Oil

Think Tesla is a bubble? This might be the best way to bet on it bursting

The huge rise in Tesla’s share price means that, by market value, it’s now the sixth-largest company in the US and and the world’s biggest car-maker. …
25 Jan 2021