Three to buy
British American Tobacco
Interactive Investor
A £957m impairment from exiting Russia has hit market sentiment towards BAT, but investors are overlooking plenty of good news. While global tobacco sales are stagnating, the group’s vaping operations are enjoying vigorous sales growth, leaving BAT well positioned for the future. A strong dollar is also helpful for a business that derives 76% of its profits from the US. The stock looks a solid pick for the “current tough times”, especially given the 6.5% dividend yield. 3,230p
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Learning Technologies
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Shares
This online staff-training business has fallen victim to the tech sell-off, despite being “highly profitable and cash-generative”. The firm works with corporate and public clients to help them burnish their skills, giving it a front-row seat in a market set to be worth $400bn by 2026. More than two-thirds of revenue last year came from the US, the top digital-learning market. With operating margins approaching 20%, analysts think the shares could be poised to re-rate over the next year. 131p
Spirent Communications
The Mail on Sunday
Spirent works with the likes of Apple, BT and Vodafone to test new telecommunications technology. The complexity of the 5G mobile network roll-out means there will be healthy demand for its services: the global number of 5G connections is expected to climb from 500 million in 2021 to 1.3 billion by the end of this year. The group also specialises in “location awareness”, a cutting-edge area that is needed for driverless cars and military drones. Spirent boasts a “strong balance sheet” and the shares yield around 2%. 276p
Three to sell
Deliveroo
Motley Fool
This online food-deliverer is suffering a post-Covid-19 “hangover”, with the shares tumbling more than 50% since the start of the year. But the fall is still no buying opportunity. The cost-of-living crisis is pushing up staff costs and will prompt customers to “cut back on takeaways”. The group’s “inability to turn a profit” is also notable. Business boomed in 2021, but it still posted pre-tax losses of almost £300m. As inflation is only likely to worsen in the second half of 2022, this is one to avoid. 95p
IWG
The Times
This office operator, which owns the Regus and Spaces brands, had barely recovered from the pandemic before being hit by the latest economic storm. The group recorded an operating loss of £36m in the first half of the year as rising staffing and heating costs, along with Asian lockdowns, weighed on performance. Now talk of “an impending recession” could see companies opt to “take less space and cut back on optional extras such as catering”. Poor results have rattled investors and mean earnings downgrades from analysts are likely. Avoid. 172p
Petrofac
Investors’ Chronicle
Soaring global demand for energy has not helped Petrofac. Sales fell by an annual 40% at the engineering and construction division in the six months to 30 June due to a “weaker oil and gas project pipeline”. Management thinks the industry is due a “multi-year upcycle” of rising investment. Yet the firm is unlikely to return to profit until next year, and will “remain far behind its 2016-2019 profit levels”. The dividend is still suspended. Sell. 117p
...and the rest
Shares
This year’s sell-off offers an entry point into small-cap British companies. The Montanaro UK Smaller Companies Investment Trust offers a “ready-made portfolio of high-quality small fry”. Judicious stock selection is more important at this end of the market owing to the presence of many illiquid or loss-making firms. The trust has a “long track record of outperforming peers” and offers a yield of 5.1% (116p).
The Daily Telegraph
IBM is no longer a technology “dinosaur” thanks to its bets on quantum computing and the cloud. It is a leading filer of corporate patents. On 14 times forecast earnings and yielding 5%, the shares are not priced for the group’s enhanced growth prospects. Buy ($129). Rising interest rates will put pressure on property prices, but a structural shortage of housing means builder Barratt Developments enjoys auspicious long-term prospects. On six times forecast earnings the market is being unduly gloomy – buy (487p).
Investors’ Chronicle
Buy-to-let mortgage specialist Paragon Bank is “well-capitalised” and has a “history of high returns”. The market may be rocky, but undervalued shares, dividends and buybacks could “herald double-digit total shareholder returns” for patient investors (554p).
The Times
Tumbling markets are complicating asset manager Abrdn’s efforts to restructure its cost base. Six years of net outflows suggest that its problems go “beyond the recent market downturn”. On 20 times forward earnings the shares are unduly pricy. Avoid (162p).
