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Ideas of the year 2021

Five themes for 2021 and 10 stock ideas to play each of them.
Ideas of the year 2021
  • A new approach for our ideas of the year
  • 5 themes for 2021
  • 10 stocks to play each

We’ve made a lot of changes to the way we present stock ideas over the last 12 months. The articles are longer and the analysis is more in depth. We’ve also rounded off the year by rebranding our “Tips” as “Ideas”. I’ll have more to say on why we’ve done this when I review the weekly tips/ideas published in 2020 in the next issue of the magazine. For now, though, the focus is our “Ideas of the Year” and some changes we’ve made here. 

Previously, we’ve highlighted eight individual shares as our Tips of the Year. Often these stock ideas pick up on various themes that readers may  or may not be interested in. Rather than simply focusing on single stock ideas to highlight interesting market opportunities, this year we’ve put together five portfolios of ten stocks that focus on what we regard as some of the most interesting opportunities for investors going into 2021. 

Accompanying each portfolio is one in-depth write up of a stock from the list. This is not an attempt to single out one idea above all others. Indeed, regular readers will recognise many of the other names in the lists as ideas that have featured in the weekly tips section recently. Also, we hope these portfolios will help provide a reference point for some of our other coverage through the year.

So, what are the themes we’ve pegged our colours to and why?

BEST OF BRITISH
NameTIDMMkt CapPriceFwd PE (+12mths)Fwd DY (+12mths)Fwd EPS grth +12 mth3-mth Mom12-mth Mom
UnileverULVR£114,162m4,342p193.5%18%-8.3%-0.6%
DiageoDGE£69,427m2,969p252.4%99%18.8%-6.9%
RELXREL£34,633m1,792p202.6%35%5.6%-6.2%
London Stock ExchangeLSE£31,402m8,932p360.9%116%2.4%17.2%
ExperianEXPN£25,812m2,814p341.4%46%-4.8%10.1%
Spirax-SarcoSPX£8,436m11,440p421.1%20%6.1%27.1%
RightmoveRMV£5,724m656p331.1%29%10.0%2.1%
Games WorkshopGAW£3,621m11,050p312.0%63%17.6%84.5%
DiplomaDPLM£2,598m2,086p281.6%71%21.9%3.4%
DunelmDNLM£2,453m1,212p202.4%39%-4.6%5.6%
Source: FactSet. *FX converted to £     

First off, we’ve attempted to identify some of the best companies with shares listed in the UK. High-quality companies have got a lot of attention over recent years, not least because targeting such companies has underpinned the success of some of the UK’s best fund managers, such as Terry Smith and Nick Train. 

Aside from the recent strong performance of shares in quality companies, there are major all-weather attractions to buying and holding the best of the best. Companies with a clear competitive advantage, which allows them to consistently generate high returns on their investments, can create significant value over the long term. If growth opportunities exist, the success of such companies can compound over time and holders of their shares can do fantastically well. The experience of Warren Buffett is the most famous example of an investors taking this road to riches. 

The main fear with buying this type of stock is that the popularity of targeting quality plays means valuations look high. That means shares that fit this category are potentially vulnerable to de-rating. For this type of stock, interest rates have a big bearing on the value that investors can justify putting on the shares. So if expectations of rising interest rates takes hold, this could be an issue for shares even if the companies themselves continue to perform well. 

Best of British company idea: Rightmove

Best of British fund idea: CFP SDL UK Buffettology Fund

THE WORLD'S BEST SHARES     
NameTIDMMkt Cap*PriceFwd PE (+12mths)Fwd DY (+12mths)3-mth Mom12-mth Mom
MicrosoftUS:MSFT£1,271,381m$223.94321.0%8.0%42.3%
Amazon.comUS:AMZN£1,208,136m$3,206.5271-2.5%79.5%
Visa AUS:V£262,100m$205.84360.6%2.6%9.5%
NestleSWS:NESN£247,698mCHF101.82232.8%-6.8%-4.0%
AdobeUS:ADBE£181,617m$504.1744-3.6%53.9%
NIKE BUS:NKE£134,225m$142.45410.8%21.9%42.5%
Costco WholesaleUS:COST£120,420m$362.03350.8%5.1%22.8%
Industria de Diseno TextilESP:ITX£73,361m€25.76273.6%7.6%-18.0%
Estee Lauder AUS:EL£43,797m$257.46450.8%22.7%24.5%
Domino's PizzaUS:DPZ£11,797m$398.72310.9%-3.6%36.5%
Source: FactSet. *FX converted to £     

With our 10 world’s best shares, we’ve taken our hunt for quality global. The underperformance of the UK market in 2020 has proved a salient reminder that what’s on offer in London differs greatly from elsewhere. In particular, the UK lacks exposure to some of the areas where the highest quality companies with the best growth prospects are to be found. For example, while information technology makes up 22 per cent of the MSCI World index, making it the largest sector, it only represents 1.4 per cent of the equivalent UK index, making it the second smallest sector.

So it only makes sense for any hunt for world-leading companies to be conducted on a global basis. For many investors the best way to move beyond the home market will be through funds. However, dealing in individual overseas shares is also becoming increasingly easy for UK investors using mainstream share dealing platforms. Dividend withholding tax can be an issue, but the use of buybacks to return capital by many of the best overseas companies, and the emphasis on growth, can make this less of a concern.

The world's best shares company idea: Visa

The world's best shares fund idea: Monks Investment Trust

DISRUPTIVE TRENDS      
TrendMkt Cap*PriceFwd PE (+12mths)Fwd DY (+12mths)Fwd EPS grth +12 mth3-mth Mom12-mth Mom
Tech - AI£815,273m$1,720.2228-19%17.8%27.3%
Tech - EVs£455,792m$640.341710.0%574%50.9%689.4%
Tech - AI£246,880m$531.13470.1%78%5.1%121.9%
Tech - Payments£214,234m$243.4954-63%29.7%123.9%
Demographics£150,886m$79.42133.3%33%-4.2%-13.3%
Demographics£96,178mDkr432222.2%15%-1.2%10.4%
Climate£60,283mDkr1,168511.0%-35%35.8%73.0%
Climate£34,806mDkr1,403380.7%109%46.3%109.8%
Tech - Robotics£25,354m$125.04320.2%-41%48.0%29.8%
Tech - Wellness£17,109m$119.14232.1%-8%25.2%20.7%
Source: FactSet      

The last decade has been characterised by huge levels of disruption caused by changes in technology, demographics, global economic power and the environment. The response to Covid-19 sped up and spotlighted many of these trends in 2020. 

There could be a pause for breath in some areas that have received a major boost from global lockdowns, such as online entertainment and cloud computing. But other trends seem to be only gaining momentum. Among these, areas such as  climate change and the pivot of global economic power to Asia are among those that stand out. What’s more, from a long-term perspective, there are few signs that the pace of innovation is doing anything other than quickening. That means there should be amazing structural growth opportunities for companies tapping into these trends.

Many of these growth stories are well known and there are valid fears that there could be speculative froth in some stocks. If the frequent warnings some investors issue of a bubble are proved justified, this is where the danger lies. A lot of companies that offer mega-trend exposure are yet to achieve anything like the level of sales and profits that has been priced in. 

However, the chance to jump aboard companies and markets experiencing a period of exponential growth as new technologies and habits are adopted is among the most tantalising of investment pitches. Whether it be AI, green energy, gene editing or one of the many other points of profound global change, there are plenty of such opportunities to choose from.

A company to benefit from disruptive trends: Ørsted

Four funds to benefit from disruptive trends

COVID SURVIVORS        
NameTIDMMkt CapPriceFwd PE (+12mths)Fwd DY (+12mths)Fwd EPS grth +12 mth3-mth Mom12-mth Mom
CompassCPG£24,769m1,389p381.2%358%15.7%-26.8%
NextNXT£8,878m6,678p172.1%50%11.5%-4.8%
InterContinental HotelsIHG£8,377m4,586p460.7%-17.4%-10.9%
BurberryBRBY£7,175m1,773p281.8%1094%15.4%-19.1%
WhitbreadWTB£6,089m3,017p-0.3%-88%47.2%-27.3%
easyJetEZJ£3,540m775p-0.5%-88%56.6%-45.7%
ShaftesburySHB£2,054m535p561.1%-10.7%-40.3%
WH SmithSMWH£1,915m1,463p-0.3%-96%47.1%-44.3%
GreggsGRG£1,754m1,730p430.9%923%54.6%-23.9%
Young & Co.'s  AYNGA£600m1,205p381.1%-35.7%-25.6%
Source: FactSet        

The impact of lockdowns has been incredibly harsh for many industries. Companies have been going under at an alarming rate and there may well be plenty more business failure to come as 2021 unfolds. And many players in hard-hit sectors have had to take on significant debt, which will shackle them long after life has returned to its “new normal”. 

The flip side to this is that those companies that have suffered during the pandemic but still have strong businesses and strong balance sheets could be in line for a bonanza from a recovery. Some strong cyclical businesses could find themselves with a once in a generation opportunity to take market share from enfeebled competitors. And while many people have faced extreme financial hardship as a result of lockdown, many others that have continued to work and rack up savings. This means demand could spring back sharply as a semblance of normality returns. Meanwhile, although many share prices of good cyclicals have received a fillip from positive vaccine developments, most remain a long-way below pre-pandemic levels.

This is an area where investors need to tread carefully. The best performance in the short-term is likely to come from shares in companies that look in most distressed as prices adjust from true disaster ratings. However, we’ve been keen to highlight companies that are not at death's door. We feel the best long-term potential associated with this theme is from companies coming at the recovery from a position of financial strength even if they don’t offer the same immediate level re-rating potential.

Covid survivors company idea: Whitbread

Covid survivors fund idea: Jupiter Global Value Equity

SMALL-CAP STARS        
NameTIDMMkt CapPriceFwd PE (+12mths)Fwd DY (+12mths)Fwd EPS grth +12 mth3-mth Mom12-mth Mom
Frontier DevelopmentsFDEV£1,185m3,015p49-49%17.5%141.2%
Team17TM17£986m750p40-29%7.9%122.6%
Avon RubberAVON£976m3,145p271.2%403%-25.6%54.2%
XP PowerXPP£862m4,390p242.1%92%2.1%51.9%
FocusriteTUNE£596m1,025p330.5%332%23.5%70.0%
dotDigitalDOTD£471m158p410.6%11%14.5%69.0%
Warehouse REITWHR£455m117p185.5%-68%7.8%6.2%
AB DynamicsABDP£423m1,875p440.2%109%2.2%-17.6%
BioventixBVXP£221m4,250p---7.6%37.1%
QuartixQTX£186m388p382.5%-23%17.9%5.7%
Source: FactSet        

While UK indices representing the country’s largest companies struggled in 2020, smaller companies indices romped home. While the FTSE 100 index has delivered a negative 10.6 per cent for 2020, at the time of writing, the FTSE All Small is in positive territory with a 4.6 per cent gain while the FTSE Aim All Share has delivered a 15 per cent total return. 

The headline numbers from indices never tell the whole story because of the higher weightings given to their largest constituents, and this has had a particularly noteworthy influence this year. Still, the performance of indices in 2020 clearly shows that investors had better opportunities away from the market’s titans.

The divergence between smaller and larger companies last year can often work in the opposite direction. Still, over the long-term academics have identified smaller companies as outperforming. Intuitively this makes sense. After all, before the World’s and Britain’s best companies were big, they were small. Our list of small caps attempts to identify some of the potential big companies of the future. We are also interested in highlighting smaller companies focused on highly profitable niches which may have limited scalability but still offer sufficient potential for growth. All companies have market capitalisations of below £1.5bn.

Small-cap stars company idea: Warehouse Reit

Small-cap stars fund idea: BlackRock Smaller Companies Trust