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Five shares to watch 2022 – first quarter update

We take a look at how our five shares to watch have done over the last three months.

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.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

When we chose our five shares to watch for 2022, we couldn’t have predicted the uncertainty we’ve had so far this year. Soaring inflation and the Ukraine crisis mean uncertainty isn’t going away anytime soon, and that means more ups and downs are likely.

But we’ve always said investors should take a long-term view and there are still opportunities. With that in mind, let’s take a look at where things stand.

Investing in individual companies isn’t right for everyone – it’s higher risk as your investment is dependent on the fate of that company. If a 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.

Anglo American

We chose mining giant Anglo American for its diversified commodity position. All that means is it’s not reliant on one material or group of metals, so when the price of one suffers, another should in theory pick up the slack. This is still a key long-term attraction.

Commodities are also a natural hedge against inflation, since mining companies benefit when they can sell their goods at increased prices.

This diverse range of materials also helps buoy performance when times are good. And Anglo’s full year results showed just this. There was revenue growth of 63% to $41.6bn, as prices for key commodities rose. Underlying cash profits (EBITDA) more than doubled to $20.6bn, beating analyst expectations. The strong performance fed into a final dividend of $1.18 and a special dividend of $0.50 per share.

The strength in commodity prices has helped the market reassess its value of the group upwards. Remember though, share prices can go down as well as up.

Commodity prices are likely to have peaked – or close to it – so the level of profit seen recently is unlikely to repeat. Conditions are still expected to be positive for the time being, but medium-term uncertainty should be considered. Keep in mind, Anglo aims to pay out 40% of profits as dividends, so lower profits could mean a lower dividend and dividends are always variable and never guaranteed.

Ultimately, Anglo remains in a financially sturdy position and its longer-run attractions are intact. As a miner, investors should keep in mind its fortunes are likely to broadly track the ups and downs of the wider economy.


Lloyds Banking Group

The first quarter of the year has seen Lloyds announce a strategy shift. The group plans to spend £4bn over the next few years. Priorities include more digital investment, as well as expanding Wealth services.

Personal finances and pensions have become increasingly complex over the years, so we like the move to increase its services in these areas.

But looking to the here and now, the reasons we chose Lloyds still ring true. It’s still very much a bread-and-butter bank – it relies on traditional lending more so than its peers. That makes recent interest rate hikes an especially helpful tailwind. Net income rose 9% to £15.8bn at the full year mark, reflecting a 4% increase in underlying net interest income to £11.1bn.

The supportive conditions have allowed the group to release provisions put aside during the worst of the pandemic. The better-than-expected wider economic outlook means the group’s felt comfortable announcing hefty shareholder returns, including a buyback of £2bn. The prospective dividend is currently well covered by earnings. Remember, no dividend is ever guaranteed though.

Lloyds has also been buoyed by increased mortgage lending. A very active housing market isn’t going to fizzle out overnight, but we do think it could start to calm down in the short term. Rising interest rates make mortgages more expensive. This isn’t a derailment of Lloyds’ investment case, but it’s something to keep in mind once we get a look at the next set of results. We think the current price to book ratio of 0.66 is undemanding, though ratios shouldn’t be looked at on their own – it’s important to consider the bigger picture.


Polar Capital

Polar Capital is a fund management group listed on the Alternative Investment Market. As of the end of December 2021, the group had £24.3bn of assets under management (AuM) across 32 funds and three investment trusts. It has a lot invested in technology and healthcare in particular.

The group’s had a tough start to the year, with year-to-date market sentiment subdued. This is largely down to a change in sentiment towards the tech sector.

As market sentiment has moved away from favouring high-growth companies, towards value investing, Polar Capital has felt the brunt of that change. It’s trying to offset some of that by snapping up smaller boutique investment managers with expertise in other areas – including value investing.

A reasonable proportion of costs come from performance related fund management fees. That means its cost base can flex in tougher times.

It’s prudent of us to note we think things could get worse before they get better. Interest rates are set to rise in the coming months, and this compounds the existing shift in sentiment away from tech stocks.

With that in mind, we believe the long-term picture is still intact. Asset management is traditionally an attractive place to be, and we admire Polar Capital’s alternative revenue streams. The recent sell-off means the price to earnings ratio has come down significantly, which doesn’t necessarily reflect those strengths. However, investors should keep in mind further ups and downs should be expected.


Smith & Nephew

Smith & Nephew is lagging the wider market. We feel the market reaction has been a bit too harsh, and that Smith & Nephew’s attractions aren’t currently reflected in the market’s assessment. Of course, nothing is guaranteed.

The group is a medical technology company – which has strong market positions in things from components for joint replacement surgeries to wound management and sports medicine. It’s in a good position as the medical world catches up on cancelled elective surgeries. Longer-term sources of growth stem from ageing populations and increased healthcare spending.

The group had full year revenue of $5.2bn, up 10.3% on the previous year. That fed into an operating profit of $593m, significantly higher than the year before.

There’s also a new CEO at the helm. We see this as a good time for someone new to take the reins, as the group embarks on its growth strategy. We think the departure of existing management might have contributed to the share price slide though, and it does increase execution risk.

Ultimately, we think Smith & Nephew is still in an excellent position. Supply chain constraints do have the potential to upset the apple cart, especially in orthopaedics – so investors should be prepped for some bumps in the road.


Tate & Lyle

We haven’t had full years from Tate & Lyle at the time of writing this, but we did have an update on third quarter trading. Following portfolio changes to focus on higher-growth areas of the business, trading is in-line with expectations.

As a reminder – the group doesn’t make the golden syrup or sugar its namesake is famous for. The group is instead focused on making ingredients like sweeteners and thickeners as well as some larger bulk commodity businesses. Tate & Lyle is making great headway on its strategy shift. We think there’s scope for margins to improve in a big way over the long term, now a lot of the heavy lifting is over.

But we would be remiss not to mention rising commodity prices. Tate & Lyle relies a lot on things like corn, because many of its products come from corn by-products. Ukraine is a large exporter, and the recent price volatility will have had an effect on Tate & Lyle.

Tate & Lyle does have some contracts locked in, which means it can offset some of this for the time being. But if prices remain elevated for too long, or spike further, this could delay some of the expected margin progress.

Overall though, Tate & Lyle’s position is exciting. A big strategy shift amid rising input costs isn’t without its risks though. The market has reassessed its valuation of Tate & Lyle upwards in recent months, with the price to earnings ratio of 16.2 pricing in a lot of the group’s strengths.


This article is not personal advice or a recommendation to buy, sell or hold any investment. If investors are not sure of the suitability of an investment for their circumstances, they should seek advice. 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 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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    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.

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