Our top share tips for 2022: invest in Chile, Disney and silver
MoneyWeek writers’ top tips for 2022 include an online electrical goods retailer, an Indonesian car dealership and a gold miner.
MoneyWeek writers’ top tips for 2022 include an online electrical goods retailer, an Indonesian car dealership and a gold miner. Here's what each of our experts likes for the year ahead.
Marks Electrical Group (Aim: MRK) listed on the stockmarket in November. Barring one set of half-year results, we have learned little about it since – except the share price has risen by 10%. The company’s flotation allowed owner and founder Mark Smithson to cash in nearly 30% of his shares at a propitious time. The company sells cookers, refrigerators, washing machines and televisions, and for substantial periods competitors such as Currys and John Lewis had closed their retail stores due to lockdowns. Almost all Marks Electricals sales were made online.
An internet-sales boom coupled with a shortage of supply drove profitability to remarkable levels. So we must be cautious about the firm’s immediate prospects. Although Marks Electrical anticipates revenue growth of 35%-45% in the current financial year, profit margins will fall now that rivals’ stores have reopened. My back-of the-envelope forecast suggests, conservatively, that the shares may be trading on a multiple of 27 times the profit it might earn in 2022.
That is quite a price tag, but over the long term Marks Electrical believes it can increase its market share from 1.5% to 10%. One reason is that it is almost completely unknown, something it plans to change by spending more on advertising. Another is that it is a simpler, more coherent business than its rivals. A focus on premium brands of bulky electricals means the value of each lorry load is high, which justifies the expense of owning its own fleet staffed with trained installers who are incentivised partly by customers’ ratings.
Vehicles are maintained and fuelled at its only warehouse, from which it can deliver next day to nearly all the people of England and Wales. Automated systems keep prices keen without undercutting rivals because it sells itself on service – witness glowing reviews. As customers move their spending online, Marks Electrical may well be a better long-term bet than the alternative, bigger but less focused AO World.
I have been a closet bear for the last three years, although always fully invested. I froze in the headlights as markets imploded during the initial pandemic-induced slump, then was almost as inert as they rebounded.
But the net result of doing very little has been yet another year of wholly undeserved good returns. Now I am creeping out of the closet, yet staying invested as I expect to sell a good-sized business for cash in 2022, making me about 33% liquid. Otherwise, I would be actively top-slicing. The primary skill I intend to sharpen is how to short indices.
My mood is increasingly defensive, to which the standard response is to buy bullion (where my current exposure is small), but I prefer the gearing offered by large, listed mining companies. Hence my tip is Fresnillo (LSE: FRES), the world’s largest silver miner, producing around 55 million ounces (oz) along with 760,000 oz of gold per year. Listed in London, it has five large and two small mines in Mexico, with a giant new project coming onstream from 2022. For Fresnillo the costs of mining silver and gold are low at $14 and $935 per ounce respectively (the metals sell for $22 and $1,780), so profit margins are fat. Ore reserves are enormous.
The stock has lagged the FTSE All Share index and the gold price over the past five and ten years, which is why I am bullish: it is a contracyclical, defensive and cheap investment with little debt. It is on a 2022 price/earnings (p/e) ratio of 14 and yields 3%. As an ecowarrior and serious tree planter I am embarrassed to recommend a mine. Moreover, if you are bullish then ignore me. Otherwise, it’s a safe, easy buy.
I highlighted entertainment giant Walt Disney’s (NYSE: DIS) shares in February 2019 at $111; by March this year they had nearly doubled to a $202 peak. They’ve since slid to $153, down 16% this year versus a 24% gain for the overall market, making them attractive again. Covid-19 clearly worries investors as Disney’s theme parks and attractions are all about socialising. They made up nearly 40% of sales before the pandemic. However, the sharpest share-price slide was in November 2021 after weak annual results. Analysts thought the hugely successful Disney+ streaming service launched two years ago would reach 125 million subscribers in the year to 30 September. But it fell short with 118.1 million – still a 2.1 million increase. Some linked the jitters to the retirement of highly respected CEO Bob Iger (see page 29).
New CEO Bob Chapek inherits Iger’s savvy deals: he bought the Star Wars studio, top animator Pixar, superhero powerhouse Marvel and the Twentieth Century Fox library. Films such as Spiderman and Eternals are breaking box-office records, and follow previous Disney mega-hits The Avengers and Black Panther. Disney is still targeting between 230 and 260 million subscribers by 2024. Big-screen blockbusters will attract them, helped by television tie-in chart-toppers such as The Mandalorian and Loki from Star Wars and Marvel respectively. Key to streaming success is content: Disney has committed $33bn to new material this year.
Meanwhile, it’s a question of when, not if, we start to put Covid-19 behind us and see travel and leisure return. Theme parks have already been quick to respond and we will see this again as news improves in 2022. As big content spending ramps up, economies reopen and blockbusters keep smashing box offices, Disney’s shares will test their recent highs.
I am going to do something stupid with my tip for 2022 and recommend a gold miner. The reason is that I think it will be taken over. Among the majors, there has been something of a pick-up in takeovers in the last few months: Agnico Eagle merged with Kirkland Lake Gold, Newcrest acquired Pretium Resources and then last week Kinross Gold bid for Great Bear Resources.
No wonder. To discover and develop a ten-million ounce resource in a safe jurisdiction takes ten years or more and costs over half a billion dollars. Yet thanks to the ongoing bear market, exploration budgets have been slashed. So the majors, in order to replace mined reserves, are trying to acquire developers and early-stage producers in safe jurisdictions. The spotlight, specifically, seems to be on the safe, mining-friendly jurisdiction that is Canada .
But there just aren’t that many “elephant” (super-large-sized) deposits left. In Canada there are five: Treasury Metals, Sabina (nine million oz), Artemis (eight million oz), Marathon Gold (five million oz) and, my pick, Moneta Gold (Toronto: ME), formerly Moneta Porcupine Mines, which has 8.4 million oz. The current bid for Great Bear will see it effectively taken over at somewhere between $150 and $250/oz (its resource-estimate will be published next year). With a market capitalisation around C$150m, Moneta is effectively priced at US$15/oz. The resource update scheduled for early next year should see the figure rise to ten million ounces. Then we will see a preliminary economic assessment that should give it another boost. US$50/oz, or even $100, is not so unrealistic a target.
Moneta has been a dog for years, but the old management is gone. The new team wants to add ounces, realise value and move on. This could all happen next year. There are any number of potential suitors. Even in a falling gold-price environment, this dog of a stock could finally yap.
Cris Sholto Heaton
Last December I said it was time to buy beaten-down value stocks that should benefit from a broad-based recovery. That idea hasn’t fully worked out, largely due to the new-variant scares, but I’m doubling down on the same theme.
Jardine Cycle & Carriage (Singapore: C07) is the main Southeast Asia subsidiary of the Jardine Matheson conglomerate, which owns 75% of the shares. The firm’s key asset is a controlling stake in Jakarta-listed Astra, the largest Indonesian vehicle and motorcycle dealership. Other interests include motor dealerships in Singapore, Malaysia and Myanmar, as well as non-controlling stakes in various businesses in Thailand and Vietnam, but this is principally a play on Indonesia, with Astra accounting for around 70% of profits.
On a share price of around S$21, Jardine C&C trades on a trailing p/e of just over 13 and a yield of 3.2%. Consensus estimates for this year’s earnings put it on a forecast p/e of 8.5. That might be too optimistic in the short term, but an eventual return to something close to pre-crisis earnings per share (S$2.23/S$3.04) would put it on a p/e of less than seven (and a yield of 5.6% if the dividend is restored to pre-crisis levels).
The caveat is that Jardine C&C has been getting cheaper for a few years. Investors have lost interest in Southeast Asia, conglomerate components often trade at a discount and there is likely to be a rights issue at some point to pay down debt used to buy some of its minority stakes. Still, it was on $30 as recently as early 2020 and it doesn’t seem a stretch to expect it to get back there eventually.
My recovery tip last year was Hong Kong-listed clothing retailer Giordano, which is up a slightly disappointing 23%. However, it has turned profitable once again, has a solid balance sheet and paid a 9% dividend yield in 2021. I continue to hold.
Syncona’s (LSE: SYNC) shares are 25% below their late-2018 peak and down by 18% year-to-date. But a recent rally should signal better times ahead. The biotechnology sector has fallen out of favour.
Syncona’s products, which looked so exciting three years ago (and still do) have had to undergo the long process of clinical trials, in some cases delayed by the pandemic. Investors have got bored, both with Syncona and with its two listed investments (Autolus and Achilles Therapeutics), whose share prices have also been weak. Syncona had to push through a refocusing and management changes at Autolus, which has since secured new investment, while its treatment for adult leukaemia is progressing well.
Achilles is also said to be performing well, with ample cash. There are now 12 investments in all with five of them at the clinical-trials stage; this figure is expected to climb to eight by the end of 2022. New investments are steadily reducing the cash pile, now £535m, and increasing the potential of the portfolio, now valued at £618m.
The changes made at Autolus and the abandonment of two early-stage investments show that Syncona is not afraid to take action and cut its losses or bring about necessary change. Inevitably, not everything has worked as originally planned, but now the flow of good news should strengthen. Syncona’s target is a portfolio of 15-20 globally leading healthcare companies, invested in as start-ups, but with significant ownership retained until at least product approval. 2022 should bring that objective a lot closer.
Last year I opted for fund manager Man Group (LSE: EMG), based partly on the view that it was cheap, and also that it might benefit if sentiment towards active fund management improved even slightly. This year, the group has benefited from the flood of money that has rushed into markets, hitting a record $139.5bn in assets under management as of 30 September this year. The share price, meanwhile, has risen by around 65% in the past year, which isn’t bad at all for a FTSE 250 stock. I own a bit of Man Group, so what would I do with it now? Despite the sharp rise – and my concerns that markets will have a rougher ride next year – I’d hang on. Money is still flowing into markets, Man Group should be able to attract a good chunk of that by offering “alternative” strategies to institutional investors looking to diversify in complex ways, and the stock still looks well priced. The dividend yield is just under 5%, and the company also recently launched a $250m share buyback.
So what about this year? Over the past year, markets have done what they always do – confound expectations. Inflation made a comeback, despite the relentless protestations of central banks and many economists that it was “transitory”. Central banks eventually had to drop that description after it became apparent that their definition of the word was embarrassingly at odds with everyone else’s.
However, despite the surge in inflation, it’s also quite clear that markets aren’t yet convinced that it’s here to stay, partly because new coronavirus variants keep triggering fears of another slowdown, and partly because of concerns about Chinese economic growth. As a result, some of the stocks that you might expect to be beneficiaries of an inflationary environment – commodity producers – have been among the weakest relative performers this year. Rio Tinto (LSE: RIO) is down about 11% on the year. Its fellow mining major BHP Billiton (LSE: BHP) is up about 8%, but has still lagged the wider FTSE 100. I believe this situation could well turn around in 2022 and in the meantime, Rio yields more than 10% ,while BHP is on more than 8%. That’s too tempting for me to pass up.
One of the interesting features of the new German coalition government is that the three governing parties have committed to ensuring that the European carbon price stays above €60 per tonne. That’s as clear a message as there can be that governments are going to need to work out some way of making the market price of carbon move higher, partly to penalise polluting industries and partly to provide revenues to fund new emissions-reduction technologies.
That all bodes well for my idea, which is to buy into a carbon-price tracker. There are two exchange-traded products that track the EU’s carbon-emissions price: Wisdom Tree Carbon (LSE: CARB), which invests in futures based on the carbon price, and the HanETF SparkChange Physical Carbon EUA ETC (LSE: CO2). This newer product invests in physical contracts and thus avoids some of the challenges of putting money to work in futures-based contracts.
Whichever fund takes your fancy, to me it is clear that the price of carbon needs to increase drastically, certainly beyond $100 a tonne and probably much higher. If we’re going to make the targets set at COP26, then frankly we have no other choice and the new German government knows it. The ride will be bumpy, as with all commodities, but the direction of travel is clear over the next decade.
I also like these trackers because they have a direct measurable impact and are not vulnerable to the charges laid against most environmental, social and governance (ESG) funds of greenwashing and pointless gesturing without measurable impacts. And also, hopefully, these trackers might provide some diversification benefit for investors as part of a balanced portfolio.
Last year I recommended SDI Group (Aim: SDI), the scientific-instrument company, at 104p and it has recorded an excellent 85% rise to a recent price of 193p compared with the FTSE 100’s gain of 11.7%. This year I am recommending another high-tech Aim company. Solid State (Aim: SOLI), which celebrates its 50th anniversary this year, is a designer and manufacturer of components and assemblies for the electronics industry.
It specialises in ruggedised computing, battery-power solutions, antennas, secure-radio systems and displays for harsh environments. Customers are drawn from sectors such as defence, aerospace, environmental, oceanographic, medical, life sciences, and oil and gas.
Solid State’s results for the year to 31 March 2021 showed that sales slipped by only 1.6% to £66.3m from the previous year, while 2020-2021 saw record profitability, with earnings per share (EPS) up by 16% and the dividend rising by 18%. In March 2021 the group made two substantial acquisitions that strengthen its capabilities and both will be earnings-enhancing in the first year.
The first is Willow Technologies, which makes electro-mechanical sensing and switching components. It will strengthen Solid State’s offerings to the electric-vehicle, green technology, military and medical markets and provide added penetration of the US market. The second is Active Silicon, with expertise in high-performance digital imaging, which will complement Solid State’s opto-electronic and computing capabilities.
The interim results of 7 December highlighted strong first-half trading with revenue of £39.4m, contributions from acquisitions above expectations, net debt of £1.9m and a record order book of £70.3m. Edison Investment Research projects sales of £78.4m and EPS of 59.8p for 2021-2022. At the recent price of 1,000p, the forward p/e is only 16.7, with a forward yield of 1.9%.
Merryn Somerset Webb
The International Energy Agency (IEA) notes that if the world wants to stay on track for net-zero emissions by 2050, consumption of oil and natural gas will need to fall by 29% and 10% respectively by 2030. That’s a prospect that has fossil-fuel suppliers thoroughly spooked. The result? They are cutting exploration and production to such an extent, says Saxo Bank, that “supply is already slipping relative to demand”.
We know what happens when demand runs higher than supply: prices rise (as they already have). We also know what usually happens next: producers work to push up supply and prices fall. The solution to high prices is high prices. But there’s a problem this time: environmental, social and governance (ESG).
The rise of the idea that investing must be both clean and responsible increasingly means that investors and banks shy away from financing fossil fuel and mining projects. So prices may not fall back in the way one would normally expect, particularly if alternative energy sources have trouble filling the gap in the way politicians expect them to and if global energy use continues to rise every year. Both those things are pretty much givens.
This will not be the first time political rhetoric has run ahead of reality – but there will be consequences in the form of high inflation, muted growth (the history of economic growth is the history of cheap energy) and rising fossil-fuel prices. The simplest way to invest in this possibility is an exchange-traded fund (ETF). Saxo suggests the iShares Stoxx EU 600 Oil & Gas ETF (LSE: 0MOH).
This time last year my tip was Mexico. The country had a tough pandemic and I expected it to bounce back in 2021. I’m pleased to say that it did and the fund I selected – the HSBC MSCI Mexico Capped UCITS ETF – is up by 17.5% in the last 12 months.
Mexico’s sophisticated factories make it stand out in Latin America. In fact, the country exports as many manufactured goods as the rest of the region combined. Most other Latin American economies are far more reliant on commodities. That’s often been seen as a bad thing, but as the world puts increasing emphasis on the fight against climate change Latin America’s commodity curse may prove to be a blessing. All of the ambitious pledges made at the recent COP26 summit mean the world will need immense amounts of copper. And that’s where Latin America comes in.
Chile and Peru are the world’s largest copper producers, accounting for 44% of global output – a similar share to that which Opec, with its 13 countries, has in the oil market. Nickel, cobalt, manganese and lithium are also clean-technology metals used in electric-vehicle (EV) batteries. All four are abundant in the region, but Latin America is particularly dominant in lithium, where the “lithium triangle” of Bolivia, Argentina and Chile holds 55% of global reserves.
Another advantage is electricity. Thanks mainly to massive hydroelectric plants, Latin America has the greenest power grid in the world, with around 60% of the region’s electricity coming from clean sources. That allows Latin American countries to produce energy-intensive “green fuels’”, such as hydrogen or biofuel, with low-cost renewable electricity. That matters, because if you are using power from a coal-fired plant to make hydrogen then you’re not really combatting climate change. In short, fighting climate change will be the big investment story of this century and Latin America is uniquely positioned to benefit.
Chile looks very well placed to thrive in the energy transition. It has world-leading reserves of copper and lithium, while its solar renewable success gives it an advantage in green hydrogen. An uncertain current political backdrop won’t stop it from achieving its long-term energy potential. The best way to back Chile is to buy a local bank with wide exposure to the economy. Banco de Chile (NYSE: BCH) is going cheap.