Tips of the Year post strong first half

Source: Thomson Datastream

Events, dear boy, events

The fears expressed by the recent bout of market jitters are not without good cause - from the threat of tapering the Fed's quantitative easing (QE), to a Chinese slowdown, to political instability - and sentiment towards a number of our Tips of the Year has been hit.

The impact has perhaps been most marked on our 'Blue Sky Tip of the Year', Kefi Minerals, a gold miner. The substantial fall in the gold price has hammered gold miners' shares, which are to a large extent a geared play on the price of the metal itself. While it is horrid to see the market turn so decisively against a tip, we are pleased with the damage limitation we managed.

Indeed, part of the reason for the strong outperformance of the Tips of the Year portfolio was down to a shrewd call on the gold price by commodities writer Matthew Allen, which prevented our Blue Sky Tip of the Year becoming the Basket Case of the Year. Having recommended the stock based on its exploration prospects in Saudi Arabia, our advice shifted to hold at 3.6p on 26 February ('Have gold and silver peaked') due to fears that the gold price was headed south. It was not until 13 June, though, that following a temporary rally the tip was actually closed out at 3.35p ('Sell Kefi Minerals'). This proved an extremely canny move, as the shares are now trading at 2.15p, implying a 36 per cent loss since the sell advice measured on a mid-price to-mid price basis.

When compiling our performance statistics, we prefer to measure things on an offer price-to-bid price basis. In other words, we look at the real buying price in the market, which is above the mid price, measured against the real selling price, which is below the mid price. Unfortunately, for a small cap like Kefi this can make a big difference - to be precise a minus 4.1 per cent adjustment compared with performance measured on a mid-to-mid price basis. So the closed-out tip performance in our table shows a small negative, rather than positive, total return (see performance table).

How they've done

*Adjusted for bid/offer spread

**Closed out on 13 June 2013

Source: Datastream

The other stock most notably hit by the recent spate of unsettling market events was Energias de Portugal (EDP). This has not actually shown up in our performance table as the real action happened after the end of the half. The event in question was the Portuguese political crisis which reignited fears about the perilous state of that country's finances, and by proxy those of the eurozone. But things now appear to be being smoothed over. Shares in EDP plummeted 7 per cent from €2.47 (£2.13) to €2.29 as a direct result of the political turmoil, but have since made a comeback to €2.43. We cannot claim to have seen this event coming, but we were minded to ride it out and the impact seems to have been fairly short-lived. We also take comfort from the fact that the company reported solid first-quarter results in May.

When a plan comes together

Several other themes that our Tips of the Year honed in on have played out very nicely during the last six months, though, and are responsible for some of the really big gains in the portfolio. The biggest winner in the portfolio is our 'Value Tip of the Year', construction and land banking company Henry Boot (BHY). Our tip was largely a play on the housing recovery because Boot's Hallam Land Management business specialises in buying land, pushing up its value by gaining planning permission, and then selling it on, usually to housebuilders. Not only do improved housing market conditions mean the potential for more land sales, which allows Boot to recognise the increased value of its land bank achieved through planning wins, but it also pushes up the price builders are prepared to pay for the land. Housing market conditions have received a big boost as a result of the government's Help to Buy scheme, which part-funds house purchases through five-year interest-free loans. Boot's other businesses in construction, equipment hire and property development have also been performing well, although management remains cautious in its outlook.

Invensys (ISYS), has been another star performer during the half year. While it has not yet entirely lived up to its billing as a 'Takeover Tip of the Year', in so far as a bid has not yet been forthcoming, the story is certainly moving in the right direction. The main event has been the completion of the sale of the group's rail business to leave it focused on industrial software and controls equipment. The sale proceeds have made Invensys a far more attractive prospect to bidders by solving a major pensions issue and providing the group with cash to develop the business, especially the more buoyant software side. There is also further restructuring afoot which should make the group's operations more streamlined and altogether more buyable.

It's not only the racy re-rating prospects of the 'Value Tip of the Year' and 'Takeover Tip of the Year' that have produced strong returns. The 'Old Reliable Tip of the Year' sounds thoroughly boring, yet catering giant Compass (CPG) has delivered a near 18 per cent total return. Compass is one of those stocks that many investors dismiss out of hand on valuation grounds. Indeed, we tipped the stock on a ripe old forward PE ratio of 16 times forecast earnings for the year to the end of September 2013. But there can be a fine line between over-priced shares and shares that are priced high as a reflection of their enduring quality. In the case of Compass, what investors get for their relatively but not extortionately high PE ratio is a solid track record of double-digit earnings and dividend growth and forecasts of more to come based on exposure to a leading player in a long-term growth market - catering outsourcing. That said, we moved the shares to a hold at 890p at the time of the half-year results in May while advising readers to run their profits. That call was made at close to the year high of 917p, but after falling back to about 815p, the shares, at 877p, are now on the rise again.

Meanwhile our 'Income Tip of the Year', Vodafone (VOD), has delivered far more than just a hearty dividend. The possibility of corporate action has been stoking the shares higher based on speculation that its 45 per cent stake in Verizon of the US could be bought at a tasty price. In the meantime, Verizon's profits are growing fast and it continues to provide Vodafone with a hearty stream of dividend income. Sentiment towards Vodafone is also benefiting from the market's appreciation of its country-by-country strategy of moving into the provision of a broader range of data and telephony services. This attraction has been underlined by its recent agreed €7.7bn bid for Kabel Deutschland, its biggest acquisition since 2007. US cable and telecoms group Liberty Global still has the potential to up its earlier offer for Kabel, although this is considered fairly unlikely.

Yes, but, no, but...

Thanks to a timely sell call on KEFI, our Tips of the Year have managed to side-step the only real potential disaster in the portfolio so far, There have been pockets of underperformance. In fact, sometimes stocks simply don't live up to expectation. Both Imperial Tobacco (IMT) and First Property (FPO) have underperformed the market. In the case of Imperial, trading in Europe has been tough and management has been managing the market's expectations down during the six months. Nevertheless, European weakness should not come as a huge surprise. What's more, the company has done well cutting costs, which is boosting performance, and it is pushing ahead with its strategy of focusing on core brands. We remain buyers of the stock.

The lacklustre performance of First Property, our 'Aim Tip of the Year', looks chiefly to be a reflection of lacklustre newsflow. A number of deals fell through in the first half for the property fund manager, which has a particular focus on the Polish property market. However, management says it has started to see a pick up in risk appetite, which should help its business, and it is also looking to exploit the Help to Buy scheme by looking into office-to-residential conversions. While the lack of progress is disappointing, we remain buyers.

*Based on Bloomberg consensus forecasts for the next 12 months

**Tip closed out on 13 June 2013

Source: S&P Capital IQ and Bloomberg