Such risks do not stop investors taking a punt, with more than a quarter of FE Trustnet readers holding between 10 and 20 per cent of their ISA portfolio in direct equities, according to recent poll.Buying a stock that is unloved after a sharp fall has proven popular with our readers, with value stocks dominating the most popular choices.
Given how strongly markets have performed in recent years, it’s perhaps unsurprising that you’re steering clear of the companies that have performed well of late.
Here Helal Miah, investment research analyst at The Share Centre, gives his views on some of the more contentious choices that you’ve told us you are buying.
Royal Bank of Scotland – SELL
RBS has tended to make the headlines for all the wrong reasons, but better-than-expected profits saw the stock’s share price jump more than 11 per cent at the back end of last week.
Miah says investors should avoid the beleaguered bank despite its recent be there are better opportunities in the sector and market.
The bank, now majority owned by the tax payer, is still one of the worst performers in the FTSE 100 in recent years.
It has lost 84.92 per cent since it was bailed out in September 2008. By comparison the FTSE All Share has gained 54.76 per cent over the same period.
Performance of stock and index since Sep 2008
Source: FE Analytics
It has been performing better in 2014 and is up 5.17 per cent whereas the FTSE All Share is up 1.28 per cent, buoyed by a doubling of profits in Q2 compared to the year before.
Nonetheless, Miah warns that this remains a company to be avoided, and could still fall further from here.
“The management continue to make progress with long term recovery plans and the slimming down of the balance sheet. The ultimate aim is to end up with a profitable business that we, as indirect shareholders, will be able to sell off – hopefully for a profit – possibly in 2015,” he said.
“Recent results showed the bank benefit from an improving UK economy and surprised the market with a stronger first half than expected.”
“Results in July highlighted an improvement in operating profit that was ahead of forecasts, which boosted the share price and led to some broker upgrades, but some analysts warned that this progress would be difficult to repeat.”
RBS is held by eight IMA funds as a top 10 holding, including Investec UK Special Situations, JOHCM UK Growth, GAM Star Worldwide Equity and SJP Global.
ASOS – HOLD
This former darling of the stockmarket market saw a massive fall in its share price in 2014 after several years of stellar growth.
It’s clear many of our readers believe the sell-off was over the top, and Miah has some sympathies with them.
“ASOS's share price slipped significantly in March and again in June, after effectively issuing profit warnings,” he said.
“The key reasons behind these warnings were heavy discounting in the retail environment, appreciation of sterling dampening overseas earnings and heavy investment into its infrastructure.”
“Despite revenue growth of 25 per cent compared to the same period last year, the company now expects margins for the full year to be in the region of 4.5 per cent, down from the previous expectation of 6.5 per cent.”
Over the past five years the stock has made 623.31 per cent compared to 80.72 per cent in the FTSE All Share.
However, ASOS has lost 63.7 per cent since it hit its all-time high in February.
Performance of stock and index over 5yrs
Source: FE Analytics
“We recommend ASOS as a 'hold' for investors while it continues to work through short-term headwinds,” said Miah.
“We prefer to see if its full year results can shed any more light on why earnings missed guidance by such a margin. However, we remain optimistic on its future as investment should give a boost to earnings in the longer term, supported by a strong balance sheet.”
Once widely held, only one IMA fund now holds ASOS in its top 10 – EFA New Horizon Income & Growth.
Unilever – BUY
Miah says he likes this global mega-cap over the longer term, particularly for its emerging market exposure.
Unilever’s most recent period of weakness came during a poor run for emerging markets between, from May 2013 to April 2014. However since sentiment has returned Unilever’s share price has also picked up.
Like many of our readers, Miah sees it as a good indirect play on emerging markets, noting that it’s a solid company paying sustainable dividends.
“The company looks attractive as it endeavours to recover costs, expand into emerging markets, innovate on a number of already established products, improve supply chains and focus on profitable volume growth, as well as improvement to cash flow,” he said.
“This is a strategy that has been paying dividends and Unilever continues to deliver strong returns on capital employed in the business and grow its dividend.”
Over the past 10 years Unilever has gained 156.58 per cent compared to 57.55 per cent from the FTSE All Share.
Performance of stock and index over 10yrs
Source: FE Analytics
“We recommend Unilever as a ‘buy’, but would suggest investors drip feed on dips. We believe the stock has attractions for investors that want to build a long-term position in a quality global provider of home care and personal products,” said Miah.
Unilever is one of the most widely held stocks in the IMA universe, with 95 funds including it as a top-10 position.
A number of First State and Aberdeen funds are big holders, as well as Investec UK Special Situations, JOHCM UK Opportunities, M&G Recovery, R&M Global High Income and Threadneedle UK Equity Alpha Income
Standard Life – HOLD
This is one of the better performing stocks that has proven popular with investors. Miah says he recommends Standard Life as a ‘strong hold' as a lot of its potential is already reflected in its share price.
He notes some of the numbers coming out of the business recently have been a little concerning.
“The company’s Q1 trading update was mixed with assets under-management up, driven by £2.4bn of net inflows, but this represents a slowdown from the same quarter last year and fee revenue was up 12 per cent,” he said.
“At the same time Standard Life also reported a 50 per cent decline in annuity sales after the budget announcement.”
“Full year results saw Standard Life report lower operating profits before tax reflecting lower operating income actions taken in its Canadian business in 2012, although they were still above the median of analysts' estimates.”
In spite of these results, the stock is still ahead of the market in 2014, with returns of almost 7 per cent.
Performance of stock and index in 2014
Source: FE Analytics
Miah says he prefers other cheaper options in the sector, which investors should consider as alternatives.
“Our preferences in the sector are Prudential for its Asian growth story, Aviva as a turnaround idea and Legal & General for its international expansion in to regions such as the Gulf, Europe and the US,” he said.
Standard Life is held by nine funds in the IMA universe as a top-10 holding including CF Odey Portfolio, JOHCM UK Equity Income, Kames UK Opportunities, Newton Higher Income and Newton UK Equity.
