How our Tips of the Year are performing

The total return from the Tips of the Year to 22 June is 2.8 per cent, compared with 6.4 per cent from the FTSE All-Share. The underperformance looks more disappointing based on the average unweighted performance of shares from the index of 9.5 per cent and a median (mid-ranking) return of 7.5 per cent. A graph of the distribution of returns from all stocks in the FTSE All-Share index can be seen below.

Sources: Thomson Datastream, S&P CapitalIQ

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Looked at on a cumulative basis, over both three and five years the Tips of the Year continue to outperform the key index we compared them with, the FTSE All-Share, by a good margin.

So far, 2017 has witnessed the underperformance of many of the sectors that led the way in 2016, especially resources stocks. General retail has also struggled, although the mini, seven-stock personal goods sector has been the top-performing All-Share sector thanks to strong showings from luxury retail brands Burberry (BRBY) and Jimmy Choo (CHOO). We hope one of our Tips of the Year, Ted Baker (TED), will follow suit in the second half having spent the first half tarred with the ‘general retail’ brush despite itself being a constituent of the ‘personal goods’ sub-sector. The bar chart below shows which parts of the FTSE All-Share have been in and out of favour so far in 2017.

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A number of our Tips of the Year have suffered due to market themes, but in these cases we’ve found underlying progress at the companies relatively encouraging. What’s more, while there is plenty of worry in the market at the moment, we’re still waiting for much of this angst to be substantiated. Against this backdrop, we think our Tips of the Year have plenty to offer during the second half of 2017.

Oil be!

A proper contrarian tip should not be easy to swallow, and so it proved to be with satellite group Inmarsat (ISAT). Indeed, reader consternation at our inclusion of the capital-intensive business among the 2017 Tips of the Year was followed by a share price dive of over 20 per cent as rumours circulated that the company’s finance chief had been priming analysts and shareholders for a profit warning. However, trading has so far actually continued to play out much in the same vein as it did in 2016.

While a weak marine market, which has suffered in a large part due to oil price weakness, has persisted, the company continues to see very strong growth from its division that provides in-flight broadband. That said, broker forecasts have been coming down as analysts move their numbers to reflect the challenges for parts of the business.

A potential cause for excitement, aside from the historic value on offer, has come from growing speculation that there needs to be consolidation in the capital-intensive industry and that Inmarsat looks a likely bid target. Importantly, given the concerns the market has about competitive pressures in the industry, the work done by Inmarsat in 2016 to shore up its balance sheet means it looks a viable long-term player. What’s more, with the oil price showing some stability at about the $50-a-barrel mark, the marine business may start finding its feet.

Increased stability in the oil industry has already been helping our Recovery Tip of the Year, RPS (RPS). The company began 2017 by announcing it would benefit from the cancellation of provisions made against doubtful debts as customers had unexpectedly managed to find the cash to pay their bills. Considerable restructuring work at the group’s troubled energy division is also expected to benefit performance and the company reported strong trading at its annual meeting in May. RPS has also announced a replacement for its chief executive, Alan Hearne, who has run the group since 1981. John Douglas will step in to the role at the end of August, having previously run a similar Australian business, Coffey International, which he oversaw the sale of in February 2016.

The oil price has not been providing solace for our Value Tip of the Year, Cairn Energy (CNE). While some stability may have returned to the market, oil has not shown the kind of upward momentum some had hoped for following the decision by the Organization of the Petroleum Exporting Countries (Opec) to curb production. This has weighed heavily on Cairn’s shares. Sentiment may also have been dented by slow progress being made in a long-running tax dispute with Indian authorities. Final hearings at the International Arbitration Tribunal are due at the start of next year. On the plus side, the company has reported encouraging results from its current drilling programme in Senegal.

Credit where it’s due?

We feel three of our tips in particular have not been rewarded for their progress as we’d have hoped. Our International Tip of the Year, US pharma stock Merck (US:MRK), has been reporting strong drug trial results. The company is a key player in one of the most exciting parts of the drug market, an area of cancer treatment known as immunology. It is reaping rewards from its strategy of trailing its Keytruda drug in a large number of very specific patient groups. However, political rancour over drug pricing in the US has overshadowed the sector since the start of the year. It looks as though this headwind could now be abating, though.

There are strong signs that the Trump administration will not hammer the pharma sector to anything like the extent some had thought, and it may actually help by rolling back some regulation. What’s more, the distractions faced by the Trump team, and its difficulty getting legislation through to date, means the market has become less sensitive to the president’s rhetoric. Despite sterling’s ongoing weakness, currency movements have contributed negatively to Merck’s performance to date.

Growth Tip of The Year, food producer Greencore (GNC), was tipped for its exposure to the fast-growing food-to-go trend, coupled with the potential upside from its major acquisition of Peacock Foods last year, which has substantially boosted its presence in the exciting US market. When the market learned that Greencore’s largest US customer – meat-processing giant Tyson – had spent $4.2bn acquiring Greencore’s rival, AdvancePierre, Greencore’s shares dropped sharply. While we cannot rule out the possibility that Greencore will ultimately lose business as a result of this, we see reasons to think this is unlikely. What’s more, we think the market’s fear about this less-likely outcome means it has missed a significant ‘read-across’ from the AdvancePierre deal.

In terms of Greencore’s ongoing business with Tyson, we think investors can take heart from the fact that contracts stretch several years into the future. Tyson has also co-invested in manufacturing facilities with Greencore’s Peacock subsidiary, making them close bedfellows. What’s more, Greencore spent a considerable time getting to know Peacock’s customers before it bought the operation and has been talking about broadening the relationship with Tyson. Management had further encouraging words to say on this subject when it reported stronger-than-expected full-year results in May. Indeed, given the close manufacturing relationship, there are reasons to think Greencore could win more work from Tyson as it starts to push through efficiency improvements at AdvancePierre.

True, regardless of the outcome, the Tyson deal serves as a reminder that Greencore has a lot of reliance on certain key customer accounts, which is a weakness. But we feel a significant factor that the market may have overlooked in regard to the AdvancePierre acquisition is just how much Tyson paid: about 15 times adjusted cash profits. The price tag compares with Greencore’s enterprise-value-to-cash-profit ratio of less than 10 based on broker Investec’s forecasts for the first full year of ownership of Peacock, which will be the 12 months to September 2018. That suggests to us that there is significant valuation upside.

Another one of our tips that we don’t feel has been given fair recognition for its achievements in the year to date is fashion retailer Ted Baker. The travails of the UK high street – rising costs, falling demand and the ever-present threat of online retailers – are well known. However, the higher-end, lifestyle brand part of the market, where Ted operates, has so far proved largely insulated and Ted’s UK stores do not seem to be doing at all badly. What’s more, while management is never shy about warning investors about challenges, impressive growth is being driven from increased online sales and overseas expansion. Indeed, all of these positive factors have been reflected in two better-than-expected trading updates so far in 2017.

We feel the trading news helps justify the faith we put in the company when making it our Old Reliable Tip of The Year. Unfortunately the risk that comes with the relatively high rating of the company’s shares seems to be offsetting the strong progress. In this case, though, we feel Ted boasts qualities that the market is likely to find it hard to ignore. Indeed, the plight of less differentiated retailers, in our view, only serves to highlight the attractions of Ted.

Dividend delights

Imperial Brands (IMB), our Takeover Tip of the Year, continues to offer very attractive value in our view. The company has stuck by its promise of raising its dividend by 10 per cent a year and its shares are forecast to yield over 5 per cent. These income credentials helped the shares climb strongly earlier this year, but they have since given up ground. The key issue investors have with Imperial regards its ability to produce sustained growth. Should recent initiatives to boost top-line performance have proved successful, we’d expect to start to see evidence of this in the second half, which could help drive a rerating.

The perennial takeover speculation around Imperial has cooled recently as investors have focused on potential obstacles to a bid from Japan Tobacco. We think speculation could still be re-heated and we continue to see potential for an offer, given the company’s low valuation compared with rivals and the possibility an outsider believes it has a better plan to reignite growth.

Life insurance company Aviva (AV.), our Income Tip of the Year, is so far living up to expectations. The group continues to raise its dividend payout towards a target of 50 per cent of operating earnings per share (currently 46 per cent) and has even found itself with excess capital, which it is using to fund buybacks. The company has also been making disposals in less promising markets to redeploy capital to areas where the potential for returns look better. And the increased focus on the group’s fund management business also appears to be paying off, with its multi-asset products in strong demand.

Hopefully, the progress made to date will put our 2017 Tips of the Year in a good position to produce more impressive results in share price terms in the next six months.