Even with the significant correction at the end of last week, equity markets have had a terrific 2013. Japan and the US have led the way, but UK managers have also had a good time of it.
According to FE data, the FTSE 100 and FTSE All Share are up around 15 per cent so far this year, building on their strong run in the latter stages of 2012.
Prices have naturally got more expensive across the board, but The Share Centre’s Graham Spooner (pictured) says certain large cap stocks have become particularly "toppy" and could suffer serious setbacks if earnings data disappoints or markets in general pull back.
Here, he identifies five such stocks in the FTSE 100.
ARM
"If conditions continue to improve, then some stocks could continue on their very good run, but some of the prices we’re seeing are very high," he said.
"One of the clear examples is ARM, which is the blue chip of its sector [seminconductor and software design]."
"It’s had an excellent run and has been re-rated to such an extent that now it’s trading on 50x earnings."
"It’s done really well, but there are small concerns about competition from the likes of Inktel. If this puts up a challenge to ARM’s monopoly, then the share price could come under pressure."
"I just feel investors in this company could be due a reality check," added Spooner.
According to FE data, ARM is up 327.45 per cent over three years, compared with 47.18 per cent from the FTSE 100. This makes it one of the best-performing large cap companies over the period.
Performance of stock vs index over 3yrs
Source: FE Analytics
The stock suffered more than most during last week’s correction, shedding in excess of 10 per cent.
ARM is a popular holding among UK fund managers, appearing in the top-10 of 16 funds in the IMA universe. These include the likes of Rathbone Global Opportunities and Giles Hargreave’s Marlborough UK Leading Companies fund.
It has a market cap of £13.7bn.
AstraZeneca
Spooner says The Share Centre currently rates pharma giant AstraZeneca as a "sell", because it feels the company's valuation does not take into account the various headwinds facing it.
"Our problem with this one is that we prefer other things in the sector," he said. "It’s on a price/earnings [P/E] ratio of 10x, so it doesn’t jump out as an expensive one."
"However, we think it looks a bit toppy because of the competition in the sector, and the fact that it has fewer eggs in its basket."
"It doesn’t have the credit range or product range of Glaxo and there are concerns about generic drugs eating away at their revenue."
"The shares have done pretty well, though not as well as others in the sector, but still we think it stands out as one that could underperform."
AstraZeneca is up more than 40 per cent in the last year, performing particularly strongly in the last three months or so.
Performance of stock vs index over 1yr
Source: FE Analytics
GlaxoSmithKline is trading on 14x earnings, but Spooner says it is worth the extra expense.
AstraZeneca has a market cap of £43bn and is currently yielding 5.8 per cent. It is one of the most popular stocks among UK equity managers, particularly those with an income focus. Neil Woodford’s Invesco Perpetual High Income portfolio is one of 165 funds that hold Astra in their top-10.
easyJet
Budget airliner easyJet has been one of the best-performing companies of the last year, up more than 160 per cent.
The growth of the company, which now has a market cap of £5bn, has seen it move in to the FTSE 100.
Performance of stock vs index over 3yrs
Source: FE Analytics
Spooner says the growth in the share price reflects very strong developments in the business, but he thinks it is now due a sizeable correction.
"We’ve recently moved it on to a 'sell' rating," he said. "It’s done brilliantly, which was helped by its move into the FTSE 100. When this happens, a lot of trackers buy into it because they have to, and this tends to push up the share price."
"Often this is followed by a period of underperformance, which we haven’t seen yet."
"There are also a few risks on the horizon. There were some strikes in France from air traffic controllers about a month ago, and it’s not out of the question that it could happen again. When it does happen, it’s most likely to come over the summer."
"There have also been problems in Spain, which could happen again."
Spooner also points to worries over the outbreak of SARS in China and the Middle East as a potential threat to the business.
"It doesn’t yield a great deal and is looking a bit expensive – especially when you consider these risks," he added.
easyJet is currently yielding 1.9 per cent and is trading on a P/E of 15x.
M&G Recovery is one of 14 funds that hold the company in their top-10.
Next
Spooner also points to Next as another company that has had a brilliant run, but that will find it difficult to sustain its rise.
Performance of stock vs index over 5yrs
Source: FE Analytics
"It's become the darling of the sector," said Spooner. "It has reacted very effectively to trends and fashions, but it's at an all-time high and the P/E is creeping up, while the yield is falling."
"We're starting to get a little bit cautious now. All it would take is a little bit of bad news and you could see the shares come under pressure. We've had a bad bout of weather which could have an impact, and this could result in Next taking a breather."
The £7bn company has seen its P/E ratio rise to 14.5x in recent months and it is currently yielding 2.55 per cent.
Thirteen funds hold Next in their top-10, including Nigel Thomas's AXA Framlington UK Select Opps portfolio.
Kingfisher
Last up, Spooner points to multinational retailer Kingfisher as one that could see a pullback, for similar reasons to Next.
"Again, something like the weather could have a real impact on this company," he said.
"There’s been a lot of talk about Kingfisher benefiting from the pick-up in the housing market, but I think this has been factored in to the share price."
"Indeed, the impact of the housing market may not have the impact that some analysts are hoping for. Consumer spending power looks weak, and it’s also exposed to China and Europe which have their own problems."
Kingfisher is up 18 per cent in the last year, 65.21 per cent over three, and 165 per cent over five.
The £7.7bn company is currently yielding 3.2 per cent and is trading on 13.5x earnings.
It is the least-held stock of the five, appearing in the top-10 of only one fund – HSBC Common Fund for Growth.
