City analysts are often berated for making the wrong buy and sell calls and for forecasting numbers that ultimately prove to be bogus. But the results from our 'great expectations' stock screen, which produced a 25.9 per cent total return last year compared with 15.5 per cent from the index (see table), suggests it may pay to give the City's broking brains more credit.
How last year's screen performed
Company | TIDM | Total return (20 Dec 2011 - 12 Dec 2012) |
---|---|---|
Ashtead | AHT | 84.0% |
BTG | BTG | 16.5% |
Oxford Instruments | OXIG | 45.1% |
Berkeley Group | BKG | 34.5% |
Bovis Homes | BVS | 29.7% |
Weir | WEIR | -5.5% |
Fenner | FENR | 4.2% |
Telecom Plus | TEP | 20.8% |
Rotork | ROR | 40.7% |
Shire | SHP | -10.6% |
Average | 25.9% | |
FTSE All-Share | 15.5% |
Source: Datastream
Our screen seeks out FTSE 350 companies that have seen a hike in consensus EPS forecasts for the coming year of 10 per cent or more over the past 12 months. So if EPS of 10p was being forecast for 2013 a year ago, that forecast would need to have risen to 11p or more today. We are also looking for predictions of 10 per cent plus earnings growth for the following year as well as strong share price momentum.
While there are good grounds to be sceptical about anyone's ability to forecast corporate prospects very far into the future, many famous investors, such as Martin Zweig and John Neff, advocate using brokers' forecasts as a steer. Strong forecast growth and upgrades to EPS predictions are important pointers to market sentiment and a company's general direction of travel.
True, lofty expectations can stretch valuations and lead to big losses if a company fails to live up to the hype. That said, there were few disasters from last year's screen, but we're of the opinion that this may have been down more to luck than design. The risks from this year's screen are added to by a high concentration of stocks from a single hot sector, in the shape of seven housebuilders.
The full criteria for our screen are:
■ Forecast EPS for the coming fiscal year upgraded by 10 per cent or more over the past 12 months.
■ EPS predicted to grow by 10 per or more in the following fiscal year.
■ Share price performance at least twice that of the FTSE 350 over the past year.
■ Outperformance of the FTSE 350 over both six and three months.
We've taken a closer look at the five stocks experiencing the biggest 12-month upgrades below and list the other 11 stocks that have passed the screen in our table.
EXPECTING GREAT THINGS:
US-focused equipment-hire company Ashtead has seen profits balloon recently as more American companies look to rent rather than buy equipment. The trend towards renting is being encouraged by the difficulty of obtaining loans to fund equipment purchases. There should be plenty more to go for as, according to broker Seymour Pierce, US equipment rental penetration rates of 45 per cent in 2011 compares with penetration of about 75 per cent in the UK. The Hurricane Sandy recovery effort has boosted US orders, too. What's more, the equipment hire business is notoriously cyclical and, with the US construction market having stabilised, many commentators expect to see a recovery soon. Ashtead's UK business, Plant-A, is having a tougher time but has nevertheless been achieving modest growth. Last IC view: Hold, 404p, 11 Dec 2012
TIDM | Market Cap | Price | Forward PE | DY | Net Debt |
---|---|---|---|---|---|
AHT | £2.1bn | 412p | 15 | 1.0% | £854m |
12-month Upgrade | Forecast EPS growth (next fiscal year) | 1-yr price change | 3-mth price change |
---|---|---|---|
101% | 16% | 108% | 22% |
Source: Datastream, S&P CapitalIQ
Chipmaker CSR underwent a transformation in 2012. The sale of a business to Samsung has helped the company reduce exposure to the handset market, where it had once been a leader before finding itself too small to compete. Instead, CSR is now focused on three "core" niche markets where the business can retain a leading position and generate higher margins. The compound annual growth rate (CAGR) from these areas is expected to be about 11 per cent between 2012 and 2017. The company has also created a legacy products division for matureproducts it has halted investment into. The strategic shift during the year looks canny and has driven a strong share price performance. Last IC view: Buy, 287p, 18 Jul 2012
TIDM | Market Cap | Price | Forward PE | DY | Net Cash |
---|---|---|---|---|---|
CSR | £542m | 335p | 14 | 2.0% | £178m |
12-month Upgrade | Forecast EPS growth (next fiscal year) | 1-yr price change | 3-mth price change |
---|---|---|---|
88% | 30% | 85% | 3.2% |
EasyJet treated shareholders to a nice surprise when the budget airline group accompanied full-year results at the end of November with news that it would increase its dividend payout ratio from one-fifth of earnings to one-third. There are a number of factors underpinning the group's prospects that have bolstered confidence to up the payout. For one thing, easyJet has been benefiting from the withdrawal of capacity by struggling rivals, which should provide the airline with room to grow profitably. It is also benefiting from growing demand from business customers, and the introduction of allocated seating presents the possibility of positive earnings surprises. That said, the shares have had a strong run and airlines are always vulnerable to unforeseen events, especially when the economic backdrop is weak. These negative factors are behind a recent IC sell tip. Last IC view: Sell, 744p, 21 Dec 2012
TIDM | Market cap | Price | Forward PE | Dividend yield | Net debt |
---|---|---|---|---|---|
EZJ | £2.9bn | 737p | 11 | 2.9% | £74m |
12-month upgrade | Forecast EPS growth (next fiscal year) | 1-year price change | 3-month price change |
---|---|---|---|
38% | 12% | 95% | 28% |
The success of Aberdeen Asset Management as an emerging market equity fund manager has propelled growth and last year assets under management rose 10 per cent. But as more and more money pours into its emerging market funds analysts have started to ask how the momentum can be maintained. There are a number of areas away from emerging market equities that the group is involved in. Aberdeen's emerging market debt fund has recently exceeded the $2bn (£1.25bn) mark and is seen as a particular area of potential. The shares' earnings multiple also does not look expensive compared with peers and the progressive dividend policy is another attraction. Last IC view: Buy, 344p, 26 Nov 2012.
TIDM | Market cap | Price | Forward PE | Dividend yield | Net cash |
---|---|---|---|---|---|
ADN | £4.0bn | 349p | 14 | 3.3% | £307m |
12-month upgrade | Forecast EPS growth (next fiscal year) | 1-year price change | 3-month price change |
---|---|---|---|
38% | 13% | 74% | 14% |
Business has been booming for IT testing company Anite on the back of the launch of 4G. Analysts reckon the impact of the 4G launch and rollout will underpin EPS growth of about 20 per cent for the next three years. What's more, while Anite's business is cyclical, it has recently become more broadly spread. Indeed, despite tough economic conditions, the company's network testing operation is making modest progress, the travel software business is holding up and even its 2G and 3G handset activities are proving reasonably resilient. Last IC view: Buy, 137p, 4 Dec 2012.
TIDM | Market cap | Price | Forward PE | Dividend yield | Net cash |
---|---|---|---|---|---|
AIE | £404m | 143p | 17 | 1.2% | £17m |
12-month upgrade | Forecast EPS growth (next fiscal year) | 1-year price change | 3-month price change |
---|---|---|---|
31% | 13% | 61% | 10% |
And the rest
Company | TIDM | Market Cap | Price | Forward PE | DY | 12-month Upgrade | 3-mth price change |
---|---|---|---|---|---|---|---|
Taylor Wimpey | TW. | £2.0bn | 64p | 14 | 0.9% | 25% | 10% |
Berkeley Group | BKG | £2.3bn | 1,721p | 13 | 0.9% | 21% | 11% |
Persimmon | PSN | £2.4bn | 797p | 14 | 0.8% | 19% | 1.5% |
Barratt Developments | BDEV | £2.0bn | 200p | 15 | 0.0% | 18% | 17% |
Bovis Homes | BVS | £742m | 555p | 17 | 1.2% | 16% | 10% |
Bellway | BWY | £1.2bn | 1,024p | 13 | 2.0% | 16% | 10% |
Filtrona | FLTR | £1.2bn | 561p | 18 | 2.0% | 13% | 8.9% |
DS Smith | SMDS | £1.9bn | 210p | 12 | 3.1% | 13% | 12% |
Moneysupermarket | MONY | £885m | 165p | 19 | 2.9% | 12% | 23% |
Galliford Try | GFRD | £587m | 726p | 11 | 4.1% | 11% | 9.4% |
Sports Direct International | SPD | £2.3bn | 381p | 15 | 0.0% | 10% | 8.4% |