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  • Five share ideas for an ISA

    Investment ideas for this year’s Stocks and Shares ISA.

    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

    The HL Share Research Team

    Inflation is still above the Bank of England’s target of 2%, meaning it’s more important than ever to make our savings and investments work harder. ISAs can help: you can use a Stocks and Shares ISA to invest up to £20,000 free from UK income and capital gains tax this tax year (6 April – 5 April).

    Bond yields and interest rates are considerably higher than in recent years. This means equities are facing more competition. But over the long term, stocks have tended to outperform other asset classes. Although past performance is no guarantee of future returns.

    Investing in individual shares isn’t right for everyone. That's because it's higher risk: your investment depends on the fate of that company. If that company fails, you risk losing your whole investment. If you cannot afford to lose your investment, investing in a single company might not be right for you. You should make sure you understand the companies you're investing in and their specific risks. Make sure any new investment forms part of a diversified portfolio.

    Before you can buy US or Canadian shares, you'll need to complete a W-8BEN form - this entitles you to tax savings on any dividends and interest you earn.

    This isn’t personal advice or a recommendation to buy, sell, or hold any investment. Share prices can go down as well as up in value and there’s always a risk you could get back less than you invest. Yields are variable and income is not guaranteed. Overseas dividends can be subject to withholding tax which might not be reclaimable. Key figures and ratios shouldn’t be looked at on their own – it’s important to look at the big picture. If you’re not sure what to do, please seek advice.

    Information correct as at 16 February 2024 unless otherwise stated.


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    Canadian clean energy giant

    Cameco is a company at the epicentre of the clean energy transition. This Canada-based giant is engaged in providing uranium fuel to generate clean, reliable baseload (minimum amount of electric power needed to be supplied to the electrical grid at any given time) electricity around the globe. The company also offers nuclear fuel processing services, refinery services and it manufactures fuel assemblies and reactor components.

    Attitudes towards nuclear energy show signs of shifting in Cameco’s favour. Policymakers are more proactively proposing nuclear as an important part of energy plans. In some cases, full-scale anti-nuclear stances are being reversed. We think the market is primed to grow from here. Not only because of the helpful megatrend of cleaner energy solutions, but because there is limited uranium supply coming online at a time when demand is increasing.

    Source: Cameco (e denotes expectations) 2023

    There are many reasons for this heightened demand. A big one is geopolitical tensions, especially in Russia, meaning countries are looking for ways to reduce reliance on the region for energy production.

    Cameco is primed to benefit. It has several approved and built assets in less volatile regions ready to fire up. Almost 90% of uranium consumption is in countries with little-to-no primary production and Cameco has controlling ownership of one of the world’s largest high-grade uranium reserves.

    The group’s revenue jumped 39% to $2.6bn in 2023, partly because of rising uranium prices and volumes. Operating profit margins are in the region of 15%, and these are expected to more than double in the coming years.

    Cameco is exposed to political risk. We think policymakers will remain on a more nuclear-friendly course, but this isn’t guaranteed and could change, which would affect Cameco. Any nuclear disaster events would badly hurt the valuation, too. Also, uranium is a commodity, and that makes Cameco exposed to a cycle it has little control over, which can cause fluctuations in sentiment.

    Ultimately, increasing supply chain anxiety and a reassessment of nuclear’s place in energy production means we’re at an inflection point for uranium demand. Cameco is a well-placed name to capitalise on this, and its high barriers to entry keep competitors at bay. Although share prices can fall as well as rise.


    Fizzy drink dividend king

    The next entry on this list needs very little introduction. Coca-Cola is a beverage giant, selling its products in more than 200 countries and territories across the world. That helped revenue and operating profit grow at mid-single digit rates to around $45.8bn and $11.3bn respectively in 2023.

    Coca-Cola’s operating model is what sets it apart from other drink makers. The group focuses on selling its concentrate syrup, rather than doing the actual manufacturing and bottling. That helps keep a lid on costs and supports its industry-leading gross margins, which hover around the 60% mark.

    The real secret formula to Coca-Cola’s success doesn’t lie in a vault. Instead, it lies in successfully aligning its interests with those of its bottling partners. The group does this by having a roughly 20-25% stake in its most important bottlers, with a significant portion of remaining shares typically owned by a single family. This ownership structure helps to align focus on long-term growth, with skin-in-the-game family owners naturally being more patient than your typical public investors.

    Coca-Cola’s cemented its position as a dividend king, having grown its annual dividend for 61 years in a row. Though dividends can be variable and not a reliable indicator of future income. Its dividend position is supported by extremely healthy free cash flows. Coupled with falling net debt levels, we think there’s room for increased share buybacks moving forward. Buybacks are when a company repurchases its own shares, typically reducing the total number of shares. As always, any shareholder returns are never guaranteed.

    Coca-Cola annual reports (2023* is Coca-Cola’s announced expectation)

    Keep in mind that revenue growth’s unlikely to shoot the lights out. Acquisitions could be one way to pick up the pace, but the big risk here is that getting the right brand at the right price is a difficult task. And even if Coca-Cola pulls it off, several years of investment would likely be needed to ramp up production and elevate brand awareness amongst consumers.

    The valuation’s come down over the last 12 months, now sitting at 20.8 times next year’s earnings. We think this marks an opportunity to pick up a quality company at an attractive valuation. But investors should remember nothing is immune to ups and downs, especially over the short term.

    GlaxoSmithKline (GSK)

    Hitting significant clinical milestones

    The drug development industry has several attractions for investors. Demand for essential medicines tends not to be too volatile even in difficult economic conditions. And the high barriers to entry, such as multi-billion-pound research programmes and complex regulations, mean that speciality pharmaceutical developers can enjoy a wide competitive moat. It can also be a challenging sector. There’s constant pressure to develop new therapies to offset the loss of exclusivity from more established bestsellers as patents expire. And many experimental medicines never make it to market.

    More than a year has passed since the demerger of GSK’s consumer health division, Haleon. We’re impressed with the progress it’s making as a fully focused biopharmaceutical company. In 2023, we saw two earnings upgrades and four major product approvals. There’s potential for more significant clinical milestones in 2024. However, there can be no guarantee of continued success.

    Vaccines are proving to be a key growth driver. The recently approved respiratory syncytial virus (RSV) vaccine, Arexvy, has made a good start following its commercial launch. There’s more to go for, but it faces some tough competition.

    HIV medicines are another key area for the business. Newer treatments are now gaining traction, as generic competitors eat away at the pricing power of some of its legacy products. Cancer treatments are another area where GSK is making progress, with several late-stage programs in the pipeline.

    Strong cash flows and manageable debt levels underpin a prospective dividend yield of 3.7% although this is not guaranteed. This also supports selective acquisitions which is adding to the healthy research pipeline.

    Source: GSK 2023 results

    GSK's valuation is significantly less demanding than many of its peers. This may be in part due to remaining questions over cancer links to heartburn drug Zantac. A key legal hearing in the matter is currently underway. We think much of the risk of an unfavourable outcome is reflected in the valuation, although there’s still potential for the outcome to cause further pain. Once more clarity emerges, strong execution of the growth strategy and clinical pipeline are likely to be the key focus for shareholders.


    Solid core with game-changing potential

    Microsoft is one of a handful of stocks that’s been on a rocket ship to the moon in recent months. But why, and is it sustainable?

    Excitement’s centred around artificial intelligence (AI). Microsoft is top of the pack when it comes to the potential monetisation of AI. AI can be integrated into the majority of its existing products, which has the potential to significantly raise revenue and margin ceilings in these areas. By doing this, the appeal of Microsoft’s products should increase, which will help culminate in better pricing dynamics too. And the group also owns a large stake in OpenAI, which is behind ChatGPT.

    Microsoft also has an enormous cloud business too. This offers all sorts, including helping companies that need to boost their computing power and abilities to build out their own technologies. Growth here has been impressive.

    We’re excited about Microsoft’s prospects. But investors should remember that game-changing technologies often cause waves in the stock market. New technologies come with steep development costs and regulatory risk in the AI space is also a hurdle. Ups and downs are possible.

    Luckily, Microsoft has an excellent core business rumbling away in the background with its Office suite. Software-as-a-service (SAAS), in the form of programs like Word or Excel to name just a couple, helps underpin very enviable 40%+ operating margins. Last quarter, the group generated free cash flow of $9.1bn.

    Source: Microsoft Q2 earnings release

    The recent inclusion of Call of Duty maker Activision Blizzard opens up a new frontier for gaming revenue potential, but we'd like a bit more detail on the growth strategy.

    The question of where Microsoft’s ship will land in the short-term will be governed by forces largely outside of Microsoft’s control. Things like external technology budgets and when the Federal Reserve decides to cut interest rates. That serves as a reminder that there are no guarantees.


    Primed to beat expectations

    2023 was a tough year for UK banks. Fears around the UK economy and customer deposits shifting into longer-term and less profitable accounts fuelled negative sentiment across the sector.

    NatWest’s higher sensitivity to this deposit migration led the group to downgrade its margin guidance in late 2023. There were also some NatWest-specific concerns centred around its corporate governance, which led to significant changes to its board of directors. While these risks have improved, they haven’t disappeared completely.

    But with all this now factored into the lower valuation, we think there’s a lot to be positive about from here.

    Source: Refinitiv Eikon

    Price-to-book value shows a comparison of a firm’s market capitalisation to its book value, or the value of a company’s total assets minus its total liabilities.

    The deposit migration and resulting drop in net interest margin (a measure of profitability in borrowing/lending) is expected to stabilise this year. This should stem falling profits on this side of the business.

    Loan defaults have stayed lower than first thought, and we’re not expecting any major uptick over 2024. NatWest isn’t top of the pack when it comes to the quality of its mortgage book. But on the flip side, it boasts one of the lowest levels of higher-risk unsecured lending in the sector. This is an added benefit should macroeconomic conditions worsen.

    Relative to UK peers, we expect NatWest to see one of the biggest tailwinds from the structural hedge financial strategy over the next two years, likely generating around £1bn of extra income by the end of 2025.

    The group’s CET1 ratio (which essentially shows how well-capitalised banks are) of 13.4% as at the end of 2023 is very comfortable. It helps underpin the group’s latest 6.9% forward prospective dividend yield and share buyback programme. But of course, shareholder returns aren’t guaranteed.

    At the current depressed valuation, the potential for returns looks attractive for both the business and shareholders in our view. We think there’s room to beat market expectations on the upside, but recent governance issues are likely to hold back a step-change improvement in sentiment over the near term.

    A member of the Equity Research team holds shares in NatWest.

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    No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future and investments rise and fall in value so investors could make a loss. This has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.