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Screening for stock picks

Nick Hyett explains how we use a simple screen to identify two stocks with very different characteristics.

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.

To narrow down the list of thousands of global companies, we ran some screens to get to our growth and value ideas. That essentially means filtering the stock market by certain features designed to highlight particular types of company.

Price-to-earnings (PE) ratio – A common valuation measure that divides the share price by profits per share. All else being equal a lower PE ratio represents better value.

For value names, we looked for a company that trades on a price to earnings ratio of less than both the market, currently 12, and the company’s long-term historical average.

The growth screen was a bit more straightforward. We filtered for companies that analysts reckon can grow their earnings by more than twice the market average (8% in both the UK and US, according to Bloomberg data) over the next two years, although of course there are no guarantees.

Value: GVC

We know shares in gambling companies aren’t for everyone, but we think the Ladbrokes, Coral and bwin owner deserves consideration as a value play. It’s got some growth characteristics too, but we’ll come to that.

View the GVC share factsheet

Shares fell earlier this year when management sold shares back in March. Concerns around the proposed £2 per spin limit on in-shop fixed-odds betting terminals (FOBTs) has tempered hopes of a recovery.

However, we think trading has been encouraging.

While profits tumbled in the retail division, the scale of the decline hasn’t been as bad as feared. In August’s half year results, the group described how a greater than expected number of punters had transitioned spending from FOBTs to over-the-counter sports bets.

As a result, fewer than expected shops are likely to close. Guidance for this year’s adjusted cash profits rose £10m to between £650m and £670m.

Looking beyond this year, there are plenty of reasons for optimism. The online business continues to grow strongly, with wagering and profits rising 14%.

The US business has room for growth too. A Supreme Court ruling has paved the way for sports betting across the nation, and a joint venture with MGM gives GVC a chance to capitalise on the opportunity – although it’s early days.

Learn more about GVC shares including how to invest

GVC - Trailing P/E

Past performance is not a guide to the future. Source: Thomson Reuters 29/08/2019

Growth: Amazon

If you’re looking for a textbook growth stock, look no further than Amazon.

View the Amazon share factsheet

The US tech giant might already be one of the biggest companies in the world, but its appetite for growth is far from satiated. The US and international businesses are both churning out impressive growth, with sales up 20% and 17% respectively in the 12 months to 30 June.

And there’s plenty of non-retail growth too. Amazon’s web services unit (AWS), which supplies computing power to other businesses on demand, has also delivered remarkable success. A string of other innovations have bolstered the offering over the years, including the voice activated Alexa assistant, one-day shipping and a stable of quality video content. Developing these features, plus the investments in AWS, has limited profit growth up to now, but analysts expect Amazon’s bottom line to start moving through the gears.

Net income is expected to grow by 17% this financial year, then 43% and 52% in 2020 and 2021. That underpins the lofty rating of 59 times expected earnings, so if those projections aren’t met, the shares could fall in value.

If Amazon does hit those targets, however, the blossoming advertising business will likely be playing a part. Amazon’s website attracts a huge number of visitors, and that traffic inevitably has a high propensity to spend.

Monetising that opportunity by giving retailers the opportunity to pay to move up the search results list offers the potential for high-margin growth. It’s not playing a starring role in the story just yet, but it’s an area we’ll be watching with interest.

Learn more about Amazon shares including how to invest

Amazon - Operating Profit ($bn)

Scroll across to see the full chart.

Past performance is not a guide to the future. Source: Thomson Reuters 29/08/2019 *estimate

Unless otherwise stated estimates are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. 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.

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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