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Ideas Of The Year 2022

Find out the most exciting companies to play the most exciting themes for 2022
Ideas Of The Year 2022
  • The big themes persist
  • The stocks change a bit
  • The crystal ball remains broken

It is that time of year when crystal balls are out in great abundance. They’re polished and ready to go. What do we see lurking in the mists? A scary new Covid variant? The emergence of 70’s style inflation? The sinking of battleship Boris? The triumph of crypto?

There is something linking all these speculations. They reflect the things we already know to think about. The irony of any attempt to predict the future is that we naturally focus on what we can observe and understand in the present rather than the unmanageable myriad of unforeseeable events, both major and trivial, that 2022 will hold. 

Last year, the Investors’ Chronicle edged a bit further towards the admission that the magazine is not staffed by clairvoyants - you just can’t get the staff, hey! We decided to present five portfolios of ten shares for the year ahead, which addressed persistent areas of interest. We are sticking with the format. And the crystal ball remains broken. 

The persistence of the themes highlighted is mirrored  to some extent by the persistence of some of the companies that we think represent the best ways to play them. So a good sprinkling of the names in this year’s ten-stock portfolios are familiar from 2020. That said, we have made a conscious effort to freshen things up. 

And the Investors’ Chronicle team is once again taking a deep dive into one stock off each list which we feel offers particularly interesting prospects. Each of the themes presented below is accompanied a table of our ten picks. The data in the table may differ somewhat from that in the tables of the actual single company write ups due to slight timing differences. Check prices before any trades. A more detailed, data-rich, excel version of the tables can be downloaded here:

So, what are the five themes and why do we think they are worth following?

 

Best of British

The British stock market is much maligned. It is seen as the home to many corporate dinosaurs. Massive, mature businesses that have gone ex-growth. Many even struggle to pay their outsized dividends without dipping into debt. And many also now face large bills to fund playing their part in the transition to a net zero economy over the coming decade. No surprise many international investors decide to give UK stocks a wide berth.

However, nestled in with our listed corporate giants are a number of first-rate businesses. Not only do these companies have strong prospects but arguably they are overlooked based on their attractive  ratings compared with overseas rivals. The stock we’ve highlighted from this year’s Best of British list, Experian (EXPN), is, we think, a case in point. 

In the main, the kind of stocks we are looking to put on this list are what many people refer to as “quality compounders”. These are businesses with a strong competitive advantage that allows them to achieve high levels of profitability. Ideally they also have excellent growth prospects, providing an opportunity to invest profits back into the business to create value for shareholders. 

However, we are also offering a couple of more leftfield takes on quality. We have a housebuilder, Vistry (VTY), on the list because we are impressed by its strategy and attracted to its shares’ valuation. We also have a utility, SSE (SSE), which is diverting cash away from dividends to invest in renewable energy assets that could achieve very attractive rates of return. 

Read our Best of British idea of the year, Experian, here 

NameTIDMMkt CapNet Cash / Debt(-)*PriceFwd PE (+12mths)Fwd DY (+12mths)FCF yld (+12mths)EBIT MarginROCEFwd EPS grth NTMFwd EPS grth STM3-mth Mom3-mth Fwd EPS change%
Halma plcHLMA£11,963m-£280m3,151p460.6%2.1%20.0%15.9%10%8%1.3%5.2%
Croda International PlcCRDA£13,871m-£866m9,942p391.2%1.9%22.9%15.5%9%5%9.3%3.0%
Experian PLCEXPN£33,149m-£3,224m3,592p351.2%3.0%23.3%17.8%17%12%6.0%7.7%
Rentokil Initial plcRTO£10,594m-£1,099m570p301.2%3.1%12.8%9.2%12%10%-7.2%4.7%
AVEVA Group plcAVV£10,103m-£628m3,351p301.2%3.4%7.2%3.0%16%14%-16.9%4.0%
Rightmove plcRMV£6,642m£56m784p331.1%-72.2%143.0%13%10%6.3%2.0%
Auto Trader Group PLCAUTO£6,854m-£2m723p271.2%3.8%67.3%33.4%24%8%17.5%8.6%
RELX PLCREL£45,892m-£6,409m2,372p242.3%3.7%23.1%17.1%14%10%6.6%4.4%
SSE plcSSE£17,451m-£9,929m1,638p175.3%-0.3%16.0%5.9%14%3%-0.9%2.5%
Vistry Group PLCVTY£2,622m-£6m1,180p86.2%6.2%9.1%4.7%15%4%-5.8%3.2%
source: FactSet             
* FX converted to £             
NTM = Next Twelve Months            
STM = Second Twelve Months (i.e. one year from now)         

 

Bounce-back shares

We started 2021 with beaten up stocks having made an astronomical revival from their lockdown lows thanks to positive vaccine developments. 

It feels like backing contrarian plays are no longer all about Covid. This has prompted a change of title for this particular list from “Covid Survivors”. However, the shadow of the pandemic still looms large. In fact, one of our most speculative punts on the list, online white-goods retailer AO World (AO.), saw its shares taken to the moon by excitement over a massive Covid-related sales boost that transformed its profitability. But the Covid hero has turned to zero. But beyond the good reasons for investor disappointment, an interesting business may still exist. 

Property play NewRiver Reit (NRR), which features in our write up, is still in the long shadow of the grinding pandemic. So too are budget airline easyJet (EZJ) and publishing and conferences business Euromoney. That said, the pandemic concerns may be distracting investors attention from Euromoney’s (ERM) valuable data business.

A number of other companies on the list are being overhauled by management and contain potential overlooked nuggets of value. For example, while Pendragon (PDG) is chiefly seen by investors as a poorly performing car dealer, it also owns a successful and growing cloud based car dealer software operation. A business transformation plan also has potential upside and a Swedish investor with a large stake could prove a potential activist. 

Business reinvention also sits behind the attraction of BT (BT.A) and HSS Hire (HSS). Like Pendragon, BT also has attracted the interest of an investor who could make waves in the form of telecoms tycoon Patrick Drahi who has an 18 per cent stake.

Read our Bounce Back Shares idea of the year, NewRiver Reit, here 

NameTIDMMkt CapNet Cash / Debt(-)*PriceFwd PE (+12mths)Fwd DY (+12mths)FCF yld (+12mths)EBIT MarginROCEFwd EPS grth NTMFwd EPS grth STM3-mth Mom3-mth Fwd EPS change%
AO World PlcAO£512m-£102m107p322--2.5%-15.2%-47%473%-53.8%-93.0%
HSS Hire Group PLCHSS£101m-£151m14p6---6.3%290%8%-16.9%76.8%
BT Group plcBT.A£16,853m-£18,763m170p84.6%4.9%14.3%8.1%6%-2%6.0%1.3%
Xaar plcXAR£148m£14m188p1166-0.1%-4.8%-6.6%-3044%0.4%-
Frontier Developments PlcFDEV£734m£20m1,864p32-2.4%21.2%15.0%30%33%-26.6%-22.6%
boohoo group PlcBOO£1,462m£44m115p18--0.8%5.3%30.0%8%39%-57.1%-46.4%
Pendragon PLCPDG£305m-£219m22p7-1.6%2.9%7.6%-27%2%11.5%12.6%
easyJet plcEZJ£4,069m-£897m537p290.8%5.7%-69.0%-16.2%-191%-18.8%18.6%
Euromoney Institutional Investor PLCERM£1,004m-£29m919p172.5%6.9%13.1%7.7%16%18%-11.6%-6.7%
NewRiver REIT plcNRR£264m-£341m86p117.7%--1.8%22%5%14.4%-9.8%
source: FactSet             
* FX converted to £             
NTM = Next Twelve Months            
STM = Second Twelve Months (i.e. one year from now)         

 

Small-cap stars

While it can feel tough to find really exciting growth stories among the largest UK blue chips, home-grown small caps offer much richer prospects. This is the focus of our Small Cap Stars list. Good small companies with the potential to grow. We define small as companies with market capitalisation below £2bn. However, valuations of many such stocks are hefty. 

We take some solace from the fact that of all the companies on our list, the lowest forecast free cash flow (FCF) yields is over 2 per cent, which relates to YouGov (YOU). That’s certainly not screaming value but provides a sanity check given a forecast price/earnings growth ratios of about 50 times. 

YouGov’s attraction is in its ownership of and use of data. This is something that company balance sheets do a poor job of capturing. Other companies on the list create value from more traditional assets. Michelmersh Brick (MBH) owns brickworks and faces limited competition due to tough planning restrictions for new sites. Brick stock piles are also at record lows in the UK and imports, which never make up much of the market, are also lower than usual. Hilton Foods (HFG) meanwhile has been investing heavily in meat processing facilities. If all goes to plan, the benefits of these investments should start to flow through more clearly this year.

Other companies on the list benefit from strong franchises and know-how. Impax Asset Management (IPX) has, for example, established itself as a leader in environmental, social and governance (ESG) investing and is attracting assets as a result of this burgeoning investment trend. Clipper Logistics' (CLG) ability to operate logistics for retailers online operation meanwhile has tapped it into a substantial growth market even though supply chain problems present a short-term disruptive influence.

Read our Small Cap Star idea of the year, YouGov, here 

NameTIDMMkt CapNet Cash / Debt(-)*PriceFwd PE (+12mths)Fwd DY (+12mths)FCF yld (+12mths)FCF yldEBIT MarginROCEFwd EPS grth NTMFwd EPS grth STM3-mth Mom3-mth Fwd EPS change%
YouGov plcYOU£1,548m£22m1,390p500.5%2.2%3.0%15.0%20.6%25%19%9.0%12.3%
Treatt plcTET£726m-£9m1,215p420.7%2.2%-1.4%17.4%19.6%12%7%30.6%5.2%
Impax Asset Management Group plcIPX£1,838m£72m1,386p302.1%-2.7%-47.4%26%14%13.6%12.5%
IntegraFin Holdings PLCIHP£1,731m£1,442m523p262.4%7.8%-5.0%--22.3%22%8%-4.0%4.0%
Gamma Communications PLCGAMA£1,545m£13m1,604p230.9%4.2%2.3%23.5%48.0%12%8%-11.9%3.6%
XP Power Ltd.XPP£1,011m-£25m5,150p251.9%2.6%3.6%19.2%20.8%9%9%-2.8%0.3%
Clipper Logistics PLCCLG£704m-£220m688p252.0%-9.7%4.6%13.4%10%18%-17.8%-2.7%
NCC Group plcNCC£728m£49m235p192.0%5.5%2.8%11.5%9.0%54%9%-14.9%0.8%
Hilton Food Group plcHFG£1,014m-£372m1,140p182.6%8.1%-1.6%2.3%10.0%9%7%1.8%3.7%
Michelmersh Brick Holdings PLCMBH£121m£4m127p152.9%8.9%5.7%16.9%7.9%4%3%-2.3%2.2%
source: FactSet              
* FX converted to £              
NTM = Next Twelve Months             
STM = Second Twelve Months (i.e. one year from now)          

 

World’s best shares

Our list of best companies in the world is one that could have remained almost entirely unaltered from last year. However, we have made an effort to present something new and this was fairly easy given the difficulty last year with deciding which of the many strong contenders actually ended up among the ten picks. 

The focus is on global leaders with the ability to reinvest profits and compound. In most cases the virtues of these companies is no secret, though. These are massive and extremely well researched businesses, and some attract extremely high valuations. For such stocks, there is limited room for error. 

We’ve taken a closer look at one of the shares on the list that commands a more reasonable rating, wealth management firm Charles Schwab (US:SCHW).

But investors’ willingness to pay up for shares in the world’s best companies is nothing in comparison to their desire to splash the cash on businesses exploiting today’s most exciting mega trends.

Read our Worlds Best Shares idea of the year, Charles Schwab, here

NameTIDMMkt CapNet Cash / Debt(-)*PriceFwd PE (+12mths)Fwd DY (+12mths)FCF yld (+12mths)EBIT MarginROCEFwd EPS grth NTMFwd EPS grth STM3-mth Mom3-mth Fwd EPS change%
Intuit Inc.INTU$178,866m$743m$632510.4%2.2%24.4%24.0%-11%17%12.2%8.8%
Estee Lauder Companies Inc. Class AEL$83,808m-$3,997m$362450.7%2.0%20.0%22.7%-14%14%13.5%3.6%
Costco Wholesale CorporationCOST$243,742m$3,361m$550420.6%2.4%3.6%24.9%-16%10%21.5%10.0%
NIKE, Inc. Class BNKE$211,400m$2,380m$165380.7%2.0%16.3%30.6%-11%22%5.1%-2.9%
Visa Inc. Class AV$363,430m-$2,033m$218300.7%3.7%-25.4%-11%19%-2.2%2.0%
Nestle S.A.NESNCHF357,336m-CHF38,494mCHF127272.3%3.4%17.9%18.1%-15%7%10.6%2.3%
McDonald's CorporationMCD$197,975m-$44,510m$265262.1%3.1%41.7%18.1%-19%9%9.0%4.4%
Charles Schwab CorporationSCHW$152,619m$40,468m$84.4230.9%4.2%-9.6%-15%20%19.9%7.3%
Industria de Diseno Textil, S.A.ITX€87,391m€3,715m$28.0224.1%5.6%17.8%10.9%3%9%-12.9%2.8%
eBay Inc.EBAY$40,027m-$4,024m$63.9141.2%7.4%28.1%24.5%-14%10%-12.7%4.7%
source: FactSet             
NTM = Next Twelve Months            
STM = Second Twelve Months (i.e. one year from now)          

 

Megatrends

The high excitement that currently exists about innovation and mega trends is not only due to the hope that many technologies may be in or entering a phase of exponential growth. There is also excitement about many of these technologies converging to speed up each others’ development.   

It is easy to be cynical about these developments. To many, crypto currency may appear as laughable as a thing called the internet was when it emerged in the 1990’s. True, those early investors in the internet took a bath along the way to glory and many didn’t stay the journey. However, look at where we are now. 

The path of progress is never smooth, but there is certainly a lot to be excited about. There is huge potential from the fields such as: artificial intelligence; blockchain; nascent quantum computing; the internet of things; renewable energy; self-driving vehicles (including flying ones); the space industry; genetics; agriscience; 3D printing; virtual and augmented realities; robotics; the metaverse; and materials science. 

There are also hugely pressing issues that the world needs to address associated with demographics and climate change. This is providing a push from governments around the world that adds impetus to innovation trends. Indeed, seeing everything on the table and thinking about how these many emerging technologies could interact is giddyingly exciting.

However, the question of who will be the winners and when they will enjoy the spoils is an altogether trickier question. Our list of Mega Trend stocks comprise companies that are well-placed to lead and facilitate the most exciting trends of our time and also are big and well-resourced enough to make credible cutting-edge players. 

Read our Mega Trend idea of the year, Illumina (ILMN), here 

NameTIDMMkt CapNet Cash / Debt(-)*PriceFwd PE (+12mths)Fwd DY (+12mths)FCF yld (+12mths)EBIT MarginROCEFwd EPS grth NTMFwd EPS grth STM3-mth Mom3-mth Fwd EPS change%
Illumina, Inc.ILMN$59,206m-$1,272m$37989-2.1%-0.7%9.3%-43%28%-12.8%-29.2%
Amazon.com, Inc.AMZN$1,734,820m-$50,304m$3,42167-1.9%6.1%14.4%-7%49%1.2%-19.4%
NVIDIA CorporationNVDA$735,000m$7,471m$294580.1%1.6%37.5%24.6%-8%21%34.0%13.4%
Vestas Wind Systems A/SVWS€26,339m€592m€26.1440.7%4.3%4.7%15.2%-85%56%-24.4%-34.1%
Adobe Inc.ADBE$268,342m$1,125m$56440-2.8%36.8%29.9%-17%17%-9.9%0.4%
ASML Holding NVASML€288,256m€350m€697420.6%2.0%34.8%23.8%5%13%-5.6%6.6%
Microsoft CorporationMSFT$2,501,659m$51,680m$333340.7%2.7%42.1%32.0%-14%16%11.6%8.4%
Thermo Fisher Scientific Inc.TMO$256,801m-$9,660m$652300.2%2.7%27.7%15.8%-32%10%7.4%1.1%
Linde plcLIN$171,885m-$12,027m$335291.4%2.8%16.9%6.3%-17%10%9.6%4.9%
Alphabet Inc. Class CGOOG$1,814,686m$113,894m$2,93926-4.3%30.3%18.4%-20%14%4.3%7.1%
source: FactSet             
NTM = Next Twelve Months            
STM = Second Twelve Months (i.e. one year from now)          

 

Find out how our picks of the year for 2021 performed here. 

 

Also, find out which funds we have picked for 2022 to fit in with the themes identified above.