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Five shares to watch in 2019 – how have they done?

Nicholas Hyett, Equity Analyst takes a look at how the 5 shares to watch of 2019 have done this year.

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.

There was a huge amount of uncertainty swirling through markets at the end of 2018. As a result we focused on high-quality, and long-term potential companies when picking our shares to watch for the year.

A year’s a short time in investing, and a lot of the issues that troubled us a year ago are still unresolved. However, I’m pleased to say that the focus on quality has delivered results for investors nonetheless. At the time of writing the FTSE All-Share has delivered a total return, which includes dividends, of 18.9% this year, while our five shares to watch averaged 29.8%.

Of course a single strong year doesn’t mean a company’s worth holding onto going forwards. Past performance isn’t a guide to future returns after all. All investments fall and rise in value, so you could get back less than you invest.

This article isn’t personal advice. If you are unsure of the suitability of an investment for you, please seek advice.

Activision Blizzard

Third quarter sales and profits came in comfortably ahead of management’s guidance, despite falling year-on-year. That reflects an unexpectedly strong showing from World of Warcraft Classic and Candy Crush. The group’s core franchises are clearly resonating well with gamers.

However, we think the real focus should be on Call of Duty. Black Ops 4 has continued to deliver strong in-game sales growth, coming in ahead of Call of Duty: WWII in the same period last year. Newly launched Call of Duty: Modern Warfare has set new records for the franchise, already recorded more than $1bn of sales, and become the top selling premium game of the year in the US.

There’s plenty more innovation going on in the Call of Duty franchise to get excited about too. Call of Duty: Mobile launched in October and saw 100m downloads in the first month. The new Call of Duty League is due to launch in January, and while it’s unlikely to drive significant revenues in the short term we see it as a key tool in maintaining Call of Duty’s long term popularity.

Overall we’re very happy with how Activision has performed and we’re optimistic about full year results early next year.

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Ladbrokes and Coral owner GVC has had a bit of a rollercoaster year. The news that the CEO and Chairman were selling a significant chunk of their shares rocked the market back in March, while the group also had to contend with the introduction of the £2 limit on gaming machine stakes.

The tougher high street environment was expected though, and the damage has actually been less than feared. Meanwhile the online business has continued to deliver bumper growth and the new partnership in the US with MGM Resorts has begun trading in New Jersey. A recent partnership with Yahoo Sports suggests GVC’s looking to make the most of the opportunities it faces.

The group’s midway through repositioning its UK retail estate, shutting hundreds of stores that have become less profitable following the introduction of the £2 staking limit. That might hit revenues in the short term, but we believe it will provide a tailwind to margins over the coming years.

It’s perhaps no surprise that full year profit guidance was upgraded at the third quarter, given the positive trading. But it’s particularly impressive given the tough comparison with last year’s men’s World Cup boost.

Overall we think the combination of a mature UK business and US growth opportunity remains attractive. The challenges of launching a US business more or less from scratch shouldn’t be underestimated though, and nor should regulatory headwinds. We’re looking forward to next year’s results with interest.

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Intertek has had a pleasingly uneventful year. Third quarter results showed organic revenue growth for the year to date of 3.3%, with a little extra from a smattering of small bolt on acquisitions.

Modest revenue growth may not seem all that exciting, but further improvements to margins and cash conversion mean profits are very high quality. Given the group’s exposure to global trade flows, delivering steady growth despite the tensions between China and the US is testament to how critical its services have become.

One trend that’s worth taking a moment to note is the recovery in the group’s resources business. That reflects increased exploration and production activity among natural resources groups – suggesting this more cyclical bit of Intertek may have seen the market turn back in its favour.

Overall Intertek’s investment case remains pretty much unchanged from this time last year. It has benefitted from long-term trends in quality control and there’s the opportunity to grow an already market leading position though bolt-ons and product innovation in areas like cyber security and supply chain management.

A word of warning though. Intertek’s PE ratio has risen 15% over the course of the year, and is well above its long term average. Given the group’s strong performance and exceptional quality that may well be justified in the long run, but it also means the market is likely to punish disappointments.

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Primary Health Properties

At the beginning of the year we expected Primary Heath Properties (PHP) to deliver a steadily growing dividend, with some small deals around the edge to grow the portfolio of healthcare properties. Well it’s done that, but the year has ended up being more eventful than anticipated.

The merger with rival MedicX hugely increased PHP’s size. That’s created opportunities for cost savings, both in the cost of debt and operating costs. Given PHP’s Real Estate Investment Trust (REIT) structure, those cost savings should find their way through to profits and ultimately the dividend.

However being a REIT, and having to pay out the vast majority of profits as a dividend, also means growth has to be funded through issuing new shares. We’ve seen exactly that this year. That will dilute existing shareholders, but should underpin long term growth in net asset value and ultimately dividends.

2019 has been an exceptional year, but we continue to feel the group is a strong option for portfolios looking for income, although dividends aren’t guaranteed. The good share price performance does mean the prospective yield has fallen and now stands at 3.8%. Yields are variable and are not a reliable indicator of future income.

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Consumer goods giant Unilever has been the weakest performer among our shares to watch. An unwelcome surprise at the end of the year saw sales guidance downgraded for this year and the first half of 2020 too.

Given the focus is very much on delivering sales growth, that’s far from ideal. It comes after a weaker third quarter, and what growth Unilever does seem able to eke out is being driven more by price increases than volume growth. You can only push consumers so far before rival brands and supermarket own-brands start to steal market share.

It’s not all doom and gloom though.

While the recent slowdown seems to be driven by weakness in South Asia, the group’s emerging market (EM) businesses have generally been a bright spot. EM sales growth was over 6% in the first nine months of the year and we think this is the key to the group’s long term success.

The slowdown in sales isn’t expected to impact profits or cash, which suggests the group’s making progress with its efficiency programme.

In the long run we still think Unilever’s broad portfolio of brands gives the company an enviable position – after all, some 2.5bn people use a Unilever product every day. But while squeezing consumers on price and cutting costs can both support profits in the short term, there’s no substitute for selling more when it comes to sustainable growth in the bottom line.

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The author holds shares in GVC Holdings plc.

Before you can invest in US companies you’ll need to complete a W-8BEN. Find out more about the charges.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. 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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    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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