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Ideas for shares to buy, but recession question looms

Uncertain profit outlooks make it hard to decipher true value
July 4, 2022
  • Recession and when it might hit is the big unknown for company earnings
  • Defensive properties and present value of shares are key considerations

The outlook for economic growth is on a knife edge, which means our screen that looks at growth at a reasonable price (GARP) is potentially flawed. The screen assesses  whether share prices offer genuine value for the earnings and dividend growth analysts expect. The obvious problem is that company profits are linked to the wider economy, the prognosis for which is uncertain to bleak. If earnings forecasts get revised down, then what were seemingly good value shares can start to look fairly priced or expensive. 

That said, some patterns are emerging that are well worth noting for savvy investors building  watch-lists for the next market and economic cycles. 

The top ranked UK large-cap shares are packaging company  Smurfit Kappa Group (SKG), which passes 9/9 tests, and Hikma Pharmaceuticals (HIK), which fails one test. Hikma actually grew earnings per share too quickly in the past five years for the liking of our sustainable growth rate test.  Both shares are down significantly over the past three months as the market starts to shave some valuation off of pandemic winners. That’s partly the impact of rising interest rates making investors reassess what is a reasonable price for growth companies. 

Some of the mid cap shares flagged could be vulnerable to a recession, especially UK focussed businesses as the one-two combination of inflation causing consumers to slow expenditure and then tighter credit conditions.

In the US, however, the logistics businesses flagged such as CH Robinson Worldwide (US:CHRW) and truckers Cummins Inc (US:CMI) could still be interesting as American supply chains recover after Covid.

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