BP grabbed the headlines this week when its share price rocketed after it settled the Gulf of Mexico oil spill case. However, it was its rival Royal Dutch Shell (“B” Shares) that was the most high-profile share-tip of the week, with Questor highlighting its 6.6 per cent dividend and the fact its shares are trading at their lowest point for five years.
On Wednesday, Tempus recommended that investors sell out of Ocado. The company reported interim results on Tuesday and although it beat forecasts for the half year, pre-tax profits were little different from 2014’s. Its shares trade on a multiple of approximately 200 times earnings and although some traders believe the technology it has developed could put it on the same level as companies such as Amazon, this is still a long shot. The stock is volatile and the company needs to prove its model by selling to another big retailer, while there is also the prospect of a break from the Waitrose partnership. Tempus concluded the current share price cannot be rationalised.
Pearson – Sell
Questor said investors should sell Pearson. Last year it derived nearly two-thirds of its profits from the US, where it has a dominant position in the education sector. However, competitor Apollo Education recently cut its full-year guidance, while Pearson is also facing falling profits from its legacy print media business. Although it offers a 4.3 per cent dividend yield, the column questioned whether this is sustainable, while the 17 times multiple the shares trade on looks high.
On Thursday, Questor tipped Royal Dutch Shell “B”. The share price is close to a five-year low, but the upside is that the stock now offers a 6.6 per cent dividend.
Performance of Royal Dutch Shell B's share price over 5yrs
Source: FE Analytics
The column also pointed out that adventurous investors who are convinced the acquisition of BG Group will go ahead could realise a yield of close to 8 per cent by buying the target company. With oil prices – and therefore revenues in the sector – falling, this represents something of a high-risk play but Shell continues to generate cash, can borrow cheaply and has assets it can dispose of, too. The BG route looks fraught with risk and could well backfire, but the robust nature of the dividend is worth reiterating.
Sophos – Buy
Tempus tipped IT security solutions provider Sophos for the long term. The company made its market debut on Wednesday and chose to list in London rather than in the US, offering investors a rare opportunity to gain exposure to a UK tech stock. The company provides solutions to the mid-market, which it believes is vastly underserved; however, there is a lack of identifiable metrics which makes pricing the stock difficult. Shares rallied on the first day, closing at 242p against a float price of 225p – the column said it may be speculative, but there is some enthusiasm out there.
Friday
Persimmon – Hold/sell
There were mixed views on Persimmon today. Questor said investors should hang on to it, citing the solid numbers the housebuilder revealed in Thursday’s trading update and the fact it will exceed expectations of its capital return programme that was laid out three years ago. Its P/E ratio stands at 14 times for the year, falling to 11 times in 2016, which looks like good value; however, it also trades at three times net asset value and the column pointed out that profits from housebuilding are extremely cyclical.
Tempus took a more bearish view on the stock despite recognising that mortgages are getting cheaper and demand from property continues to outstrip supply. It pointed out shares are up 35 per cent since the start of the year and 22 per cent since the election, which has left valuations looking stretched. Although the column is clearly wary of calling the top of the market, it concluded that taking some profits might be a good idea.
