Investing is a long-term game and many of the most famous fund managers – including the likes of Warren Buffett – say one of the simplest and most effective methods to make money is to buy a quality company and then avoid selling it.
However, there will often come a time when a good investment becomes a bad one, whether that is because of poor management, failure to react to disruptive technology or simply because the stock has become too expensive.
It is this latter situation that Thomas Moore (pictured right) aims to take advantage of in his Standard Life Investments UK Equity Income Unconstrained fund and Standard Life Equity Income Trust. The manager focuses on a company’s potential for positive surprises in terms of revenues and cashflows in the context of what valuation he pays for it. Once the market has caught up and the share price no longer looks like a bargain, he will sell out.
In effect, the manager says he “rents” some stocks rather than owning them.
Here are three that he currently views in this way.
Galliford Try
Housebuilder Galliford Try is the first stock on Moore’s list. Although the manager admitted we are at the tail end of the boom in the housebuilding sector, he said the cycle is going to be more prolonged than previous ones because interest rates remain so low.
“One of the perverse side effects of the global financial crisis in 2008 is that policymakers are very afraid to cause another one so they are keeping everything loose. That means demand remains robust,” he explained.
“The most surprising RNS recently has been Berkeley Group, which came out and upgraded forecasts – who would have guessed that London high-end property would surprise positively?
“First-time buyers in northern England are obviously doing quite well from all the stimulus from Help to Buy. But it is quite interesting that despite all the politics, high-end also remains in good shape.”
However, Moore said you still have to be careful in the sector and so he has gone for Galliford Try as it looks particularly cheap at the moment.
“It is on 7x earnings and has an 8 per cent dividend yield and we believe that is going to be maintained,” he added. “So that’s one where we built up a position.”
Brokers are overwhelmingly positive on Galliford Try, with Liberum Capital, Peel Hunt, Numis and Beaufort Securities listing it as a “buy”.
Royal Dutch Shell
The next stock highlighted by Moore is one he said has fallen into the “ugly box”.
“What I’ve been surprised by is how many companies fall into the ugly box, or whatever you want to call it,” he explained. “The range of companies in that box varies year by year. What’s surprising is how quickly sentiment turns against companies.”
Moore gave the example of Carnival as a stock that previously found itself in the “ugly box” – before quickly seeing its fortunes change.
“In June 2016 people decided that no one was going on a cruise any more, the oil price was going to destroy the industry, Carnival couldn’t keep up with cost pressures and there was too much capacity,” he added.
“When we bought the stock it had a free cash-flow yield of 6 per cent and was on 12x earnings. We held it for one year and it went up 55 per cent.”
One stock that Moore said is out of favour now is Royal Dutch Shell – the first oil company he has held since 2012.
“Yes of course, over a longer period of time there is going to be reduced energy consumption in terms of motor vehicles,” he continued.
“But right now demand is still growing and new oil discoveries are at their lowest level since the 1940s. So that’s pretty good from a supply combination.
“And if you then put on top of that the yield premium of Shell is over 50 per cent versus the FTSE All Share, versus a historical level of 20 per cent, I think that means the stock holds some re-rating potential.
“Of course we are not having to hold Shell forever, it’s a stock we will hold opportunistically, and we believe that now is the time to do that.”
Brokers are positive on Shell, with RBC Capital Markets, Barclays Capital, Societe Generale and Deutsche Bank listing it as a “buy”.
The Share Centre also rates Shell as a buy, saying: “In recent years the company has been going through some major restructuring programmes, which should lead to cost efficiencies, increased production capacity and higher cash flows.
“Shell’s first half 2017 profits jumped to just over $5bn versus the $1bn in the first half of 2016. It showed that recent trends of better average oil prices, better operational performance, significantly reduced operating expenses and stronger conditions in the chemicals and refining sector have continued.”
Performance of stocks over 5yrs
Source: FE Analytics
HSBC
Bitcoin was one of the biggest investment stories in 2017, but Moore said that committing your money to the cryptocurrency is little more than gambling.
“I don’t know what level Bitcoin is going to peak at and it amazes me every day seeing headlines filled with people pretending they have a view on it,” he explained.
Instead he said investors would be better off holding a stock where they wouldn’t have to make “too many heroic assumptions”.
“I would suggest you may wish to look at a stock like HSBC, where the restructuring is over, it has 14 per cent core tier one, it is out of the woods in terms of its regulatory issues and you’ve got a free cash-flow yield of 6 per cent.
“And it’s growing again. It’s not a stock that you hold for ever, but we are at a point with a stock like HSBC where it’s been through the mill and it is coming out the other side and there is a re-rating potential that can drive that stock.
“It’s not like having to pretend I know where Bitcoin should be trading as actually valuation is my anchor and with a stock like HSBC that is very reassuring, because we are not having to deal with any euphoria.”
Broker views are more mixed on HSBC, with Jefferies International and Citigroup calling it a “buy” while Credit Suisse and Shore Capital predict that it will underperform.
The Share Centre recently tipped it for income-seeking investors in 2018, saying: “HSBC, which is the largest of the UK's banks, has a mix of business and geographical spread, and is keen to promote the ‘pivot to Asia’ strategy, which it hopes in the long run, will see it emerge from a difficult period for the sector.
“Indeed, around 70 per cent of its profit now comes from Asia. During the next 12 months, lower loan impairments and rising interest rates in the US could also aid its performance.”