Pick your stocks carefully

Each week, a professional investor tells us where he’d put his money. This week: Guy Davis of the Sarasin Global Higher Dividend Fund.

Equity markets have performed very well in recent years and are no longer cheap relative to their history. Compared with other asset classes, however, they look reasonably valued, so stocks remain popular, especially among investors who need stable, inflation-protected income. 

Investors should pick their stocks very carefully, however, as markets are in an unforgiving mood. The latest earnings season has shown that companies deemed expensive are disproportionately punished for a small miss in profits or a downgrade in expectations. Yet stocks that beat their earnings expectations or offer an improved outlook don’t usually get much of a boost.

When it comes to assessing individual equities, consider two key questions. Firstly, is this company trading at a discount to its intrinsic value? If so, you have a margin of safety, which is increasingly difficult to find. Secondly, if I’m paying a premium valuation, am I really getting premium stock performance and growth prospects ?

With all this in mind, one stock we like is Enel (Milan: ENEL), a utility company offering a compelling story in an otherwise challenging industry. The company is evolving from a traditional Italian fossil-fuel power company into an international renewables firm, with 60% of power output now from green energy sources. Enel’s management team make sensible strategic and capital-allocation decisions, and are set to increase their dividend payments.

Another one to consider is SES (Paris: SESG), a satellite operator in control of about 25% of all the geostationary slots available worldwide. In much of the world, satellite is the only available method of data transmission, or the one that costs the least, giving SES a solid, low-risk revenue base. Satellite launches are a significant cost for SES. The strides made in reducing the expense of getting equipment into space, facilitated by the likes of Elon Musk’s re-usable Falcon rockets, could cut SES’s launch costs by over a third.

Yet investors don’t seem to have factored in the auspicious outlook. The share price merely appears to reflect the value left in the group’s current contracts. The market is ignoring capex savings and potential future contracts. Combine the pessimistic view of the firm with a 6% dividend yield, and it’s a compelling prospect. 

Kraft Heinz’s recent failed bid for Unilever (LSE: ULVR) has prompted the Dutch consumer goods giant to release public targets intended to reassure investors that it is on top of things.
The most important of these is a 20% operating margin target by 2020. Add in a growing emerging-market business and Unilever should be able to deliver strong double-digit earnings-per-share growth over the next few years. Investors can also enjoy a well covered 3%-plus dividend yield while they wait.