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We look at the performance of our 2021 five shares to watch over the past year.
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.
A year ago, we laid out five shares we thought could be worth attention in 2021.
This year hasn’t been without its pitfalls. Rolling lockdowns, supply chain upheaval and inflation have all meant it’s been a choppy ride on the market. But overall, we’ve been rather pleased with progress.
As of 23 December, the five shares were, on average, up 29.2% over the year. That compares to a 15.9% rise in the UK stock market as a whole (with dividends reinvested). Past performance isn’t a guide to the future.
While we consider current conditions and specific growth potential over the short term, we also make sure to put forward companies we think have long term potential.
With that in mind, it’s worth taking stock of what’s changed, if anything, in the investment cases of our five picks for 2021. And don’t forget, you can now find further investment ideas in our Five Shares to Watch for 2022.
This article isn’t personal advice. Investments can fall as well as rise in value, so you could get back less than you invest. If you’re not sure if an investment is right for you, seek advice. Yields are not a reliable indicator of future income and ratios shouldn’t be looked at in isolation.
Investing in individual companies isn’t right for everyone. Our five shares to watch are for people who understand the increased risks of investing in individual shares. If the company fails, you risk losing your whole investment. You should make sure you understand the companies you’re investing in, their specific risks, and make sure any shares you own are held as part of a diversified portfolio. Please remember past performance should never be used as a guide to the future.
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All data was correct as at 3 December 2021.
Pet ownership has galloped ahead during the pandemic, rising by around 8% according to Pets at Home. As a vet group, that means CVS has reaped the rewards.
Owning lots of vet practices has obvious benefits when people are buying or adopting more pets. Including what should be recurring revenue throughout the life of those pets. This acts as a long term source of growth.
But CVS offers other services too, including labs and pet crematoria. These are great extra sources of revenue and give CVS more ways to earn revenue throughout a pet’s life stages.
The most important change to CVS should be front and centre. The valuation has reached a point that worries us slightly. Not because we think something dramatic is about to happen, but because there‘s now less room to run. The current price to earnings ratio is 26.2, which is about 35% ahead of the ten-year average.
CVS’ revenue rose just over 19% in the last full financial year, which helped underlying cash profits (EBITDA) rise 37.3% to £97.5m. And trading in the new financial year is still impressively ahead of last year’s elevated levels.
Acquisitions remain key, especially in the more fragmented Irish and Dutch markets. The group's also open to entering new geographies. And with less competition in Europe, deals on the continent are cheaper. Net debt, as a proportion of cash profits, is well under 1 giving CVS the power to pounce on any larger deals as they emerge.
The main weakness for CVS is one that affects the whole industry. There is tight supply of qualified vets, which means the group’s had to spend heavily on keeping retention rates at an acceptable level. Things are stable enough for now, but it’s an ongoing risk.
Ultimately, we continue to think CVS is a great business, and the last year has cemented that opinion. But we feel those strengths are already reflected in the current valuation. This could change at some point.
We chose Diageo because it had a broad, and in our view, defensive portfolio of brands – from Guinness to Gordons.
And while we can’t deny the last year’s been challenging, with core hospitality customers facing ongoing restrictions, Diageo’s varied products and geographies have helped it weather the storm and it recovered well.
Net sales rose in every region in the full year, reported in July, with double digit gains in every region apart from Europe & Turkey. The year was buoyed by an increase in supermarket sales, which helped offset the effect of bar and restaurant closures. This was testament to the power of the group’s brands – an advantage that very much remains intact in our view.
Overall, the pandemic dented Diageo, but hasn’t derailed the story. The group’s array of strong brands means the long term should see steady, rather than spectacular, growth, feeding into the prospective yield of 2.0%. Yields are variable though, and no dividend is ever guaranteed. Investors need to keep in mind they’re paying for the strength Diageo offers, with a P/E ratio of 27.1, some way higher than the ten-year average.
On the surface, Facebook’s undergone quite the transformation this year. It’s now formally known as Meta.
Since our last update, Meta has released its third quarter results. Revenue rose 35% to $29.0bn, largely reflecting a 33% increase in advertising revenue. Operating profit increased 30% to $10.4bn.
All-told results were a little disappointing, not least because advertising revenue is meant to start slowing down, to around 9-17% in the current quarter. This is in large part because of changes to Apple’s iOS14 software as well as “macroeconomic and COVID-related factors”.
Advertising is still Meta’s bread and butter. Although growth might be slowing, we still think the broad attractions of the company stay the same. Marketing teams pay handsomely for the data left behind by Facebook’s billions of users because of the tech giant’s unrivalled reach into our lives. That’s unlikely to change any time soon.
The group’s name change and announcement of plans to build a so-called metaverse, where users’ avatars can meet up in virtual reality, means this reach will only run deeper. Keep in mind that while that’s an impressive idea, we’ve had little detail on how, or when, this will become a reality.
The usual bug bear still exists where Meta’s concerned. The threat of further regulation and public scrutiny. Increased investment is also needed to keep regulators happy - particularly around security and compliance measures. That threat is unlikely to ever disappear and could cause short-term volatility. That’s reflected in a price to earnings ratio of 21.8, which is some way behind the longer-term average. It’s up to investors to decide if the potential reward is worth accepting the group’s potential risks.
As a brick maker, Ibstock has been hit by supply chain constraints. However, we think Ibstock’s navigated the well-publicised disruption rather well. Since the last review, Ibstock shared third quarter results which showed demand in both the repair, maintenance, and improvement and newbuild markets. That meant Ibstock had a "strong" performance. And despite progress being partially offset by the supply chain disruption, the group remains confident in reaching its full year underlying cash profit target.
Ibstock used the pandemic as an opportunity to trim fat and make its operations more efficient. That’s enabled it to funnel investment into modernising and branching out into new growth areas, like the UK’s first automated brick-slip (brick facade) factories.
The group gets paid as long as new homes are being built, so a major slowdown in the housing market remains the biggest risk. An interest rate hike could take some of the wind out the market’s sails, but we don’t see this being a huge problem. Any hikes that are bigger than expected could be problematic though.
We should mention the group’s shored up its balance sheet this year too, giving it a stronger foundation to face the new year. The price to earnings ratio of 11.9 is a little below the five-year average.
We chose Tesco for 2021 because we thought it had a good competitive position. Its scale meant it should have been able to capitalise on the boom in online demand caused by the pandemic. These predictions seem to be ringing true so far.
The latest set of results told us that the group's retail sales were up over 8% compared to pre-COVID times. Online like-for-like sales were up over 74%. Another of the core attractions was Tesco’s prospective dividend yield, which is still attractive at 3.8% and looks well supported. It’s also announced a £500m share buyback. No dividend is ever guaranteed though.
The group’s good work on proposition and huge scale means half year underlying operating profit rose 41% to £1.5bn. Full year underlying retail operating profit guidance has been upgraded too and is now expected to come in between £2.5bn and £2.6bn.
Tesco’s huge size also means it’s been able to weather supply issues and labour shortages fairly well.
The situation remains similar where challenges are concerned. Competition in the sector is likely to heat up, especially as inflation puts pressure on discretionary spending.
A price to earnings ratio of 13.1 is a little higher than the long-term average, but not unreasonable in our view.
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. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. 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. This article 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.
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