It expects the US to be among the leading regions, pointing out that the benefits of a global recovery will outweigh the impact of tapering its QE programme. It is also optimistic about Europe due to an improvement in the sovereign debt crisis. In light of this bullish view, Sheridan Admans (pictured), investment research manager at the London-based firm, reveals five stocks he thinks will benefit from an ongoing rally.
National Grid
There has been a lot of controversy surrounding the fate of energy companies. Politicians are arguing over what regulatory burden these firms should carry as prices continue to rise.
However, Admans believes the National Grid will continue to have the same defensive, income-paying characteristics it has always had and expects it to continue to perform well next year.
“Utilities stocks are traditionally for defensive investors seeking income, offering lower risk levels and dependable dividends. National Grid is the largest listed utility company in the UK and we have long been fans of the stock,” he said.
“It’s a regulated business with a prospective yield of around 5.4 per cent, combined with a management focused on improving the return on its US operations.”
“Having settled its pricing structure with regulators in both the US and UK during 2013, the company is now in a much stronger position for the year ahead. Also, whilst political pressures have hit others in the sector, National Grid has not been exposed to this. Another positive for investors is that in March the group announced the dividend will grow in line with inflation from 2014.”
The stock has performed better than the FTSE 100 over the last 12 months, picking up 16.6 per cent.
Performance of stock vs index over 1yr
Source: FE Analytics
The energy company has been even stronger over the longer term, more than doubling the returns of the index over three and 10 years, though it has lagged the FTSE 100 slightly over five years.
The stock was trading at 782p at the time of writing and is expected to pay out an attractive 5.6 per cent yield next year.
Thirty funds in the IMA universe hold National Grid in their top-10, including the five crown-rated Trojan Income fund, run by FE Alpha Manager Francis Brooke, and the five crown-rated Fidelity Moneybuilder Dividend fund.
William Hill
Major global sporting events such as the FIFA World Cup bode well for the UK’s largest bookmaker, according to Admans, who is backing William Hill for strong growth in 2014.
“2014 could be a good year for William Hill as the World Cup encourages more people to place bets,” he said.
“Also, the recent acquisition of three sports books in the US, to form William Hill US, offers investors the potential of a great growth opportunity should regulations there be relaxed.”
“Mobile technology is making gambling more accessible: no longer do you have to walk into high street bookmakers, which some may have found intimidating. Bookmakers have also been expanding their services and what they take bets on, appealing to a wider demographic.”
Admans admits the stock is more expensive than it has been in the past, but he believes the price is justified. He says he is optimistic about the prospects for the firm and adds a drop in share price since its August results could provide a good entry point.
William Hill has made 14.56 per cent over the last 12 months, slightly edging out the FTSE 100, which gained 14.53 per cent. The stock has also outperformed the index over three and five years.
Performance of stock vs index over 1 yr
Source: FE Analytics
William Hill was trading at 385.5p per share at the time of writing. It is yielding 3.1 per cent, but that yield is expected to increase to 3.5 per cent for the end of 2014.
Only one fund in the IMA universe holds the company in its top bets, the Dimensional UK Small Companies fund.
Aviva
Admans also tips FTSE 100 insurer Aviva.
“As our recovery pick for the improving global economy, we recommend Aviva for investors seeking exposure to the insurance sector. We hope to see further cost savings, improving cash generation and a chance of restoring dividend growth,” he said.
“Investors need to be comfortable with the majority of exposure to the UK and Europe, and some in Asia, and should consider drip-feeding into the stock.”
“Aviva’s turnaround and delivery on cash-flow generation is progressing. The company completed the sale of its US business in October, which is considered an important step in simplifying its operations. There is still a considerable amount to do to help cut costs and rebuild its capital base; there has been no improvement to underwriting, for example.”
Admans says that while Aviva cut its dividend in 2013 from the previous year, this should not be viewed as a negative as it will allow the firm to return to form as the global recovery continues.
The stock was trading at 437.6p at the time of writing, up 19.25 per cent over the last 12 months. It has also outperformed the FTSE 100 over three years, though it has lagged behind the index over five and 10 years.
Performance of stock vs index over 1yr
Source: FE Analytics
Aviva is currently yielding 3.6 per cent, down from 5.1 per cent last year. The yield is expected to increase to 3.9 per cent in 2014.
Forty funds in the IMA universe hold the stock in their top bets, including FE Alpha Manager Julie Dean’s five crown-rated Cazenove UK Opportunities fund and the five crown-rated Royal London UK Equity Income fund, run by Martin Cholwill.
Earthport
Software and computer services firm Earthport is one of the high-conviction bets The Share Centre is backing for next year.
“As the way we pay for services and transfer money changes – becoming more efficient and digital – we recommend Earthport as a stock to consider in 2014,” Admans said.
“Earthport is a financial services organisation that focuses on international payments for companies such as IBM, Bank of America and American Express.”
“It allows financial services providers' customers to send money overseas more securely, and at lower prices, knowing the up-front cost and expected time of arriving.”
“The company’s last set of results were encouraging and the management’s decision to discontinue relationships with clients who did not fully comply with its compliance criteria should strengthen its competitiveness.”
“With a new management team that was introduced in 2010, the company has a great deal of industry experience in either cross-border payments or technology, which is appealing.”
Over the last 12 months Earthport has soared in terms of total return, picking up 71.21 per cent. The FTSE 350 Software & Computer Services index, by comparison, gained just 26.17 per cent.
Performance of stock vs index over 1yr
Source: FE Analytics
Investors should be wary of the risks when picking up this AIM-listed holding, however, as it has a volatile past.
Over the last decade it has shed 86.48 per cent and has also nearly halved in value over five years. Earthport is one to watch in the recovery space.
The stock was trading at 28.5p per share at the time of writing. It does not currently have a dividend yield.
No funds in the IMA universe hold the stock in their top-10.
Incadea
Another software and services firm The Share Centre is backing in 2014 is AIM-listed Incadea.
The £58.12m firm was trading at 114.5p per share at the time of writing. It has a dividend yield of 1.5 per cent.
“It is a higher risk, smaller company idea that may interest investors as it establishes itself in a niche market and management highlights potential contract wins ahead,” Admans said.
“Like many emerging software companies, its product has the advantage of improving performance and efficiency.”
“The company has concentrated on developing into new emerging markets, especially the BRIC markets (Brazil, Russia, India, China), where opportunities are far greater than parts of Europe.”
Over the last year Incadea has made just 1.79 per cent, well behind the FTSE 350 index for its sector. It’s had a tough time over the shorter term, losing money over one, three and six months.
Performance of stock vs index over 1yr
Source: FE Analytics
No funds in the IMA universe hold the stock in their top-10.
