While 2013 was preceded by a second-half rally in 2012, the rise was primarily in financial stocks and small- and medium-sized companies.
However, the end of 2013 saw a rally came through in nearly all sectors and cap sizes, and markets had their best year since before the financial crisis.
The question now is whether the rally still has momentum and can continue into the year ahead. The members of the FE Trustnet team have varied views on the future, as our stock-picks reflect.
Tesco
I was more bearish than my colleagues when we revealed our first set of stock picks last year, which proved to be my downfall.
However, as we move into 2014 I feel even more wary. The debt burdens of the developed world are still high, any number of macro and political factors could sway investors' sentiment and recovering economies are still in the early stages, which means hiccups are to be expected.
With this in mind, I prefer to stick with a more stable, income-paying company, albeit one in a more cyclical sector – Tesco.
Although it has seen a great deal of negative news and is faced with staunch competition from the likes of Sainsbury’s, Waitrose and Morrisons, it is investing heavily in its product range and stores.
I think Tesco has a strong business model and the negative noise around the company will be short-lived.
It’s also cheap compared with its history, which makes it an even more attractive proposition in a time when many UK companies have already rallied.
Tesco is also expanding into India, giving it exposure to the consumer demand story in emerging markets. This will be useful if the sector sees a turnaround in the coming year.
Another bonus for Tesco is its 4.3 per cent yield, which is expected to increase to 4.5 per cent in 2015.
Last year Tesco returned just 3.6 per cent after tumbling further than the market in the June correction and sliding into the red by mid-December. The stock experienced a small pre-Christmas rally but still trailed the FTSE 100 by more than 15 percentage points.
Performance of stock over 1yr
Source: FE Analytics
Ten funds in the IMA universe hold Tesco in their top-10, including Cazenove UK Growth & Income and Premier UK Growth.
Royal Dutch Shell
Reporter Alex Paget is following the lead of the experts when it comes to his stock-pick this year – Royal Dutch Shell.
“I will happily admit that I am no expert when it comes to picking stocks, so I’m borrowing the experts’ ideas,” he said.
The blue chip oil and gas company is a favourite among UK investors: 283 funds in the IMA universe hold Royal Dutch Shell in their top-10, including JOHCM UK Equity Income and the five crown-rated Artemis Income.
“First off, star UK equity manager Richard Buxton says that it is cheap because investors have been steering clear of companies that are willing to re-invest for growth,” Paget said.
“While Shell has been investing for the future, it has rewarded its shareholders well and hasn’t cut its dividend since the First World War.”
“The reason I have gone for a mega-cap is because I think this year is likely to be more volatile as markets normalise, so that could mean investors will want the relative safety of the FTSE 100 instead of sticking with stocks in the FTSE 250 and FTSE Small Cap indices, which have had a stellar run of late.”
Royal Dutch Shell also trailed the FTSE 100 in 2013, gaining 10.42 per cent. At the time of writing it was trading on a price/earnings (P/E) ratio of 8.1, less expensive than it has been for the last four years.
Performance of stock over 1yr
Source: FE Analytics
The stock has an attractive yield of 4.9 per cent.
BP
FE Trustnet editor Joshua Ausden prefers fellow oil giant BP on valuation grounds.
“I’m backing BP to shine this year, for a number of reasons,” he said. “I see it as a value play, not only because it has yet to make back the bulk of the losses it sustained during the Gulf of Mexico oil spill, but because mega cap stocks have in general lagged behind the market rally in recent months.”
“BP is on a price/earnings ratio of 6.4 times, according to Bloomberg, making it one of the cheapest FTSE 100 stocks on this measure.”
Last year BP performed in line with the FTSE 100, returning 19.39 per cent.
Performance of stock over 1yr
Source: FE Analytics
“Cheapness isn’t the be-all and end-all of course – a catalyst is needed for BP to re-rate,” he added.
“The Share Centre recently reported that the company is restructuring itself very effectively, including selling off low-returning assets and investing more in those that have higher growth opportunities.”
“Initially this could see production fall, but investors will hopefully realise this is for the good of the company in the long-term.”
“Moreover, news that BP has increased its dividend should give its share price further support. A yield of 5.29 per cent is very high for a company of this size, and should attract interest from income-hungry investors in 2014.”
A number of high profile-investors are backing the stock, including FE Alpha Managers Adrian Frost and Anthony Cross. Deep value managers including Tom Dobell and the Schroders duo of Nick Kirrage and Kevin Murphy also like BP. Overall, 300 funds in the IMA universe hold the stock in their top-10.
Associated British Foods
News editor Thomas McMahon likes FTSE 100 food processing and retail firm Associated British Foods because he thinks the stock stands to benefit from the expansion of one of its flagship brands.
“The company is looking to expand the Primark chain into Europe, and having seen the popularity of the shop among Europeans first-hand, I think that will pay off,” he said.
“On top of this they have a number of good brands that are seeing strong growth internationally, such as Twinings and Ovaltine, with plenty of exposure to developed markets, which are going through a strong run.”
Unlike many of our other stock-picks, Associated British Foods had a strong 2013, and McMahon thinks this can continue. The stock gained 58.7 per cent in 2013, the majority of the gains coming in the final quarter of the year.
At the time of writing, Associated British Foods was trading at 2,488p per share. It has a dividend yield of 1.4 per cent.
Four funds in the IMA universe hold Associated British Foods in their top-10, including Marlborough UK Multi-Cap Growth and Rathbone Global Opportunities.
Blinkx
After selecting major UK banking firm Lloyds last year, production editor Anthony Luzio is turning his sights further down the market cap spectrum. He is backing AIM-listed internet media platform Blinkx.
He bought into it in 2011 at 113p, only to see it fall by two-thirds of its value, but he held on. Last year it rebounded well above the price Luzio purchased it at and he thinks it will continue to prosper in 2014.
“This is a video search engine that connects advertisers to consumers through professionally generated content,” he said.
“Its technology, which is protected by 111 patents, enables computers to understand sections of video and so automate expensive and time-consuming manual human tasks such as processing, analysis and tagging.”
“Among the video search engines its technology powers is AOL – which it may surprise people to hear is the third biggest video content provider online, and in September even took the top-spot ahead of Google and Facebook.”
“Blinkx generated spectacular numbers in the first half of last year – revenue up 36 per cent, pre-tax profit up 335 per cent – and as the number of videos watched on smartphones and tablets continues to rocket, I believe its price can only go higher.”
At the time of writing, Blinkx was trading at 209.25p per share. In 2013 the stock made an impressive 214.56 per cent, compared with 21.33 per cent from the FTSE AIM index, according to FE Analytics.
Nine funds in the IMA universe hold Blinkx in their top-10, including Philip Rodrigs’ five crown-rated Investec UK Smaller Companies portfolio and FE Alpha Manager John McClure’s Unicorn Free Spirit fund.
