Five Shares to Watch 2021 – half year update

While there might still be some challenges ahead for the rest of 2021, it seems the light at the end of the tunnel is getting ever brighter. And with the much-delayed reopening of the UK economy now imminent, the market has had an unsurprisingly strong run.

As of 1 July, the UK stock market has delivered a total return of 11.3% this year. But we’re pleased to say the five shares have on average done better – with an average return of 22.9%. That reflects very good results from Diageo, Facebook and CVS Group, with a slightly weaker performance from Ibstock and negative returns from Tesco.

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, ask for advice. Past performance isn’t a guide to future returns.

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.

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CVS Group

We’ve only had one brief trading update from veterinary group CVS since our first quarter update.

Management reported a steady increase in customer demand. Relaxed coronavirus restrictions mean the group has been able to offer its full range of services since the end of March. As a result the board expected revenue and underlying cash profits to be ahead of previous expectations.

The group also reported a single small bolt-on acquisition in the quarter, continuing its practice of growing through acquisition where appropriate.

Perhaps more important to CVS’s long-term health is the news that between March 2020 and May 2021 almost 3.2m UK households bought a pet – according to data from the Pet Food Manufacturers Association. That takes the total number of pet owning households to 17m, and all of those households will be paying veterinary bills for years to come.

We should flag that these very strong results have been reflected in the CVS share price, though. The shares now trade on a prospective price-to-earnings ratio of 33.3 times earnings, compared to 25.8 at the start of the year. With analysts expecting average revenue growth of just 9.8% between 2020 and 2023, that valuation could be seen as pretty full.

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Diageo

Back in May Diageo updated full year guidance – with organic operating profits expected to be up 14%, slightly better than sales growth. That reflects strong sales growth in North America, with signs of recovery elsewhere too. Given the ongoing disruption to pubs, bars and restaurants around the world, we see that as a real achievement.

The board is similarly reassured and has restarted the £4.5bn capital return programme it suspended in April 2020. That’s currently being rolled out through up to £1bn worth of share buybacks, due to complete before the end of the next financial year.

We think the group has scope for further recovery as vaccine programmes progress and more economies reopen over the coming months.

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Facebook

Regulatory challenges and the very strong growth during the pandemic mean Facebook expects revenue growth to slow as the year progresses.

However, exceptional growth recently, including a 48% sales increase in the first quarter of this year, means even modest growth from this base should be seen as a positive. Having seized a larger share of global advertising spend during the pandemic, we expect the group to fare well when marketing teams purse strings are loosened into a reopening economy.

It’s regulatory news that’s likely to dominate the newspapers where Facebook’s concerned though, and there’s some good news on that front – at least from a shareholder perspective.

At the end of June, a US judge rejected two lawsuits in the US calling for the group to be broken up. That’s important because while Facebook and Instagram might be driving the current revenue boom, it’s the potential of WhatsApp and Messenger’s huge untapped audience that makes Facebook particularly appealing.

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Ibstock

A global shortage in construction materials seems to have sidestepped the brick industry. The industry hasn’t benefitted from the surge in prices seen in products like steel, timber and cement.

Nonetheless Ibstock’s AGM trading statement still had the group trading “modestly ahead of expectations”. Good growth in both the new build and repair and maintenance markets meant brick volumes were ahead of external expectations while concrete was broadly in line.

Longer term strength in the housing market seems to have been unshaken by the pandemic. That’s led Ibstock to invest £60m in new capacity for 115m bricks a year. The new factories will contribute around £12m a year to cash profit from 2024 – with the extra volume supporting future growth even if prices remain flat.

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Tesco

While the rate of sales growth has slowed since the peak of the pandemic, Tesco’s first quarter results showed some signs of continued progress – with a recovery in wholesaler Booker leading the way. That more than offset specific headwinds in the Central European and Bank businesses.

However, the company showed last year that rising sales aren’t always enough – with operating profits falling 28.3% despite a 7.0% rise in sales. We suspect that lots of the pandemic related costs behind the profit fall will be difficult to roll back quickly. Tesco bank will likely also continue to struggle while key activities, like travel money, remain subdued. That’s disappointing, we had hoped the group would be more flexible.

Over time we still think Tesco is well placed, though. First quarter online sales were up 22.2% year-on-year, and 81.6% on 2019, reflecting huge investments in capacity. We suspect online grocery shopping will remain permanently higher following the pandemic, and this investment should bear fruit over time. We also expect that costs will come down, even if that takes longer than we had first hoped, with the additional sales picked up in the last 12 months converting to profit. Moreover, with a forecast yield of 4.6% over the next 12 months, investors will at least be paid to wait and see if the group can deliver. Remember no dividend is ever guaranteed, and yields aren't a reliable indicator of what you'll get in the future.

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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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