Tips of the Year 2014 - half-year review

2014 Tips of the Year performance

When one delves a little deeper, the narrative of the first six months of 2014 is more nuanced and dramatic than suggested by the overall figure. We believe a number of the tips still represent very good investment opportunities. But, hiding behind the positive overall performance of the portfolio, the stand-out performance of the eight tips so far this year is unfortunately a negative one.

*Based on closing prices adjusted for bid-offer spreads

Source: S&P Capital IQ

We need to talk about Zambeef

It would seem wrong not to start out by addressing the grizzly performance of Zambeef (ZAM). Indeed, for anyone wishing to lambast our ability as tipsters at this half-year stage, this is the open goal. While we feel there is little need to get overly exercised by the underperformance of HSBC at this point (the only other underperformer), Zambeef is a different story (see table). Its shares have plummeted 43 per cent, and there have been no dividend payments to bolster the overall total return either. This blood bath cannot be ignored.

But we highlighted Zambeef as a risky pick when we laid out our buy case for the stock as our Contrarian Tip of the Year. In essence, our argument was that Zambeef's 'farm-to-fork' model was the right one for the southern African market and that the returns it was making from its well-invested asset base were suffering largely due to circumstances beyond its control. On balance, we believed that following a torrid 2013, things would get better in 2014. Big mistake!

Not only is the company continuing to experience tough trading conditions in a number of agricultural sectors in its home market of Zambia - especially in edible oils where there has been a significant step up in competition - but currency weakness pummelled the first-half numbers it reported last month. The torrid results were preceded by a profit warning in April. A fall of about 2 per cent in first-half sales on a 'constant-currency' basis turned into a 9 per cent drop once currency adjustments were made. Worse still, a significant proportion of the company's costs are in dollars and the stronger dollar has proved hard to pass on to local consumers, meaning Zambeef's profitability has been decimated.

Is it time to throw in the towel? Our view is no - and not only because we are already in so deep. While the trading and currency environment is not expected to improve much in the company's second half, Zambeef has announced strategic initiatives that look sensible and could help improve returns for shareholders. In fact, with the shares trading at a massive 60 per cent discount to net asset value per share of 85.7¢ (50.4p), serious value is on offer if the company can get its act together.

The actions the company has decided to take are to diversify regionally, enter into strategic partnerships with global payers and to unlock some of the value in its asset base. We think positive newsflow that suggests Zambeef is making progress with this three-pronged strategy should help improve sentiment and the share price. What's more, as the 2014 financial year (it runs to the end of September) draws towards its sorry end, the market should begin to focus on the improvements forecast for 2015 - that is assuming hope still survives following the recent run of dud results.

Reasons to be cheerful

So, Zambeef is the stock from this year's tips that the IC team is currently beating itself up about but is nevertheless sticking doggedly by. However, there are also several noteworthy successes at the half-year stage to buoy our spirits. The top-performing tip has actually been our Overseas Tip of the year, Novo Nordisk (DK :NOVO). Perhaps ironically, a central reason behind our case for buying Novo was that 2014 was expected to be a weak year for the company in contrast to Zambeef's expected recovery. It sounds counter-intuitive to buy in expectation of poor trading, however, our feeling was that brokers had already made the downgrades to 2014 forecasts they had to and most of the damage had already been done in valuation terms. Consequently, as the year progressed we expected the market to once again start to focus on Novo's excellent long-term prospects based on rising demand for insulin caused by the diabetes-inducing global obesity epidemic. This is what seems to be playing out, and the company continues to believe that double-digit growth trends will reassert themselves following a single-digit 2014.

A number of the stocks we tipped with a predominantly domestic focus have also done well. When putting together the 2014 Tips of the Year, we felt very conscious about the emerging market risks we took on with some of our picks due to the uncertainties presented by 'tapering'. Our more UK-focused stock picks were meant to provide a counterbalance to this, and so far they have. The best performer of these has been Aim-traded Utilitywise (UTW), our Growth Tip of the Year. The energy-efficiency consultancy continues to report strong growth in customer numbers aided by investment in new staff and partnership deals. It has also recently made an acquisition to take the business into Europe. What's more, the shares still look relatively good value considering the level of growth that is being forecast. The shares have come off recently with general sell-off in growth stocks and following the placing of over 10m management incentive shares that recently matured.

The two highly-cyclical businesses we tipped with a significant UK focus have also progressed broadly to plan so far and look likely to continue to be beneficiaries of improved growth expectations. Logistics company and Value Tip of the Year Wincanton (WIN) has announced a number of contract wins in the first half and the its large pension deficit and debt means the shares continue to offer 'geared' exposure to macroeconomic trends. That said, debt is coming down, and progress is being made getting the pension deficit under control, which should boost City confidence in its prospects and has the potential to prompt reassessment of the measly PE rating. Progress is also being made boosting the group's margin through cost-cutting. Meanwhile, recruiter Hays (HAS) is trading very strongly in the UK and its overseas operation is showing promise. At its last trading update in April, management told investors to expect results at the top end of the range of brokers' estimates.

Up (and down) with events

Our two financial stocks have had a bit of a choppy ride. Old Reliable Tip of the Year Chesnara (CSN), which buys closed annuity books and generates cash from winding them down, was hit by news of pension rule changes. However, while there was considerable uncertainty at the time, these changes do not look like they will be at all significant for Chesnara itself, although they will hit companies writing certain types of new business. Importantly, Chesnara's operational performance so far this year has been impressive.

HSBC (HSBA), our Income Tip of the Year, has been fighting against a darkening mood towards emerging markets, where it does much of its business. Tapering in the US is a concern as much of the money being created by the Fed is thought to have found its way into emerging markets and a reversal of the policy is likely to mean a reversal of such capital flows. In addition, Chinese property market weakness and the potential implications for the Chinese banking system has been a particular concern. HSBC's trading results have also been on the disappointing side so far this year. However, the yield still looks very attractive and isn't viewed as being in danger.

In contrast to HSBC, Anglo American (AAL), another stock that has the potential to be hit by tapering-related sentiment, has performed well. The market has been impressed by its attempts to rationalise its operations, boost production where sensible, and rein in capital expenditure. That said, it's yet to show any sign of living up to our billing of it as Takeover Tip of the Year. That's a bit disappointing given our success over the last two years and the high level of merger and acquisition activity elsewhere. There's still time, though.

So, while the first six months of the year have not been too bad overall, Zambeef casts a noteworthy shadow over the period. We believe the stock can make up at least some of the lost ground over the coming six months, although it remains a risky bet. Meanwhile, we remain positive on all of our other Tips of the Year, leaving them all on buy recommendations for now.