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Tips of the Year 2017

The IC writers reveal their eight top share tips for the year ahead, which attempt to exploit parts of the market that may have seen an overreaction to recent events
January 5, 2017

The UK’s EU referendum result and the election of Donald Trump in the US both represent sources of major uncertainty for the year ahead, as do a number of upcoming elections in Europe. Yet the market’s reaction to last year’s political surprises in the UK and US suggests a degree of optimism about equities rooted in the prospect of increased fiscal stimulus, which could allow monetary policy to get back to a more normal state.

With our eight tips for 2017 we’ve attempted to target both the areas that should benefit from some of the changes the year is expected to bring, as well as attempting to exploit parts of the market that may have seen an overreaction to recent events. Probably the biggest risk to this year’s eight tips comes from the dollar. The currency looks expensive, and the market’s high expectations for a Trump fiscal package may not be met, which could cause a reversal.

The extent of the US exposure of the tips is not entirely by design. In some cases the theme has just coincided with what we see as particularly promising business prospects. This is the case with Growth Tip of the Year Greencore (GNC), for example. It is focused on one of the most exciting parts of the UK food market, food-to-go, and has just completed the transformational acquisition of a business doing similar things across the pond. Our choice of a US company, Merck (US:MRK), as our Overseas Tip of the Year is largely a reflection of the fact that America happens to be home to many of the best pharma companies in the world, and we think the politicisation of drug pricing that has caused sector-wide share price falls has created an excellent buying opportunity.

Some of the dollar exposure of our Tips of the Year should be counteracted by their exposure to the oil price, which tends to have an inverse relationship with the US currency. We’re enthusiastic about the prospects of oil’s recovery during 2016 continuing in the current year. Oil company and Value Tip of the Year Cairn Energy (CNE) should benefit from this as two North Sea fields move into production. What’s more, low expected production costs and a strong balance sheet should help protect Cairn from too much downside if we’re wrong about prospects for the oil price. Our Recovery Tip of the Year, engineering consultant RPS (RPS), stands to be a beneficiary of a pick-up in capital spending in the oil and gas industry, as well as increased infrastructure spending in the US. Importantly, we feel the restructuring work that was required to respond to falling demand at its energy division has already largely been done. So here, too, we’d hope any downside from a worse than expected year for commodities would be limited.

Our Contrarian Tip of the Year, Inmarsat (ISAT), has also suffered due to falling demand in its marine division connected to the subdued oil industry. There have also been delays with a satellite launch that hit sentiment and fears that newer, more efficient types of satellite could cannibalise business. However, we feel the damage done to the shares represents a great buying opportunity given the long-term growth in demand for data and the importance of satellites in delivering this around the world. The yield is also an attraction, although we do feel cover looks flimsy and more bad news could easily put the payout in danger.

The dividends from Income Tip of the Year Aviva (AV.) look altogether more reliable. The life insurer is benefiting from the work done over recent years to strengthen its balance sheet and cash flow. What’s more, the group is a late mover into the asset management business, but is starting to make impressive strides. We feel further progress here should give the stock scope to re-rate. Recent rises in 10-year bond yields should be positive for the industry as a whole.

One part of the market hurt by rising yields is so-called ‘bond-proxy’ stocks (reliable dividend payers). In some cases we think such stocks now look like bargains. Our Takeover Tip of the Year, Imperial Brands (IMB), is a case in point. The forward dividend yield has leapt from 3.8 per cent to 4.8 per cent since the election of Donald Trump. We think this looks attractive given Imperial’s commitment to growing the payout by 10 per cent a year. What’s more, while investment in top-line growth will hold back its earnings this year, we think the market could warm to the stock as this spending starts to show signs of bearing fruit as 2017 progresses. However, Imperial may not make it that far without being bought by a rival given its lowly valuation compared with peers, its attractive brands (especially in the US) and the wave of consolidation in the sector.

Fashion brand Ted Baker (TED) is another stock that has suffered due to the change of sentiment towards high-quality growth plays, along with Brexit-related anxiety. While its shares’ rating can hardly be described as cheap, it is low by historic standards. What’s more, we think Ted Baker will continue to have pull with fashion-conscious punters and can build on its very impressive trading record. We’ve made it our Old Reliable Tip of the Year.

Click below for our Tips of the Year 2017

GROWTH

VALUE

INCOME

OLD RELIABLE

OVERSEAS

RECOVERY

TAKEOVER

CONTRARIAN

Find out how our 2016 Tips of the Year fared.

See also our Fund Tips of the Year for 2017