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Three share ideas for a Stocks and Shares ISA

Whether you’re topping up last minute, or getting ready for the turn of the tax year, here are three share ideas for a Stocks and Shares ISA.

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.

We should try and make the most of tax saving allowances. After all, less tax means higher returns. ISAs currently give us the chance to shelter £20,000 a year from UK income and capital gains tax.

We have to point out that coronavirus has the potential to create headwinds for any company – expect more uncertainty and volatility for at least a while. But, we believe in taking a long-term view when it comes to investments, and we’ve chosen our ISA share ideas accordingly.

With the end of the tax year fast approaching on the 5 April – time’s running out to make the most of your allowance.

This article is not personal advice, so if you’re unsure of an investment for your circumstances, please ask for advice. All yields are variable and not a reliable indicator of future income. Tax rules can change and benefits depend on individual circumstances.

Investing in individual companies isn’t right for everyone. Our shares for ISAs are for people who understand the risks of investing in individual shares. They’re higher risk as your investment depends on a single company – 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.

Novo-Nordisk – steady revenues in a growing market

Novo-Nordisk manufactures nearly half of all insulin worldwide. Insulin and other diabetes treatments accounted for 84.3% of sales last year and the group’s crucial position in the global healthcare industry has made sales very reliable. That should remain true even during the current coronavirus outbreak.

But as well as some naturally defensive characteristics we think the group has long run growth potential. That’s why it has a place in our five shares to watch this year.

5 shares to watch for 2020

Diabetes is an increasingly common disease. In 1980 there were 108m people in the world with diabetes, by 2014 that number had risen to 422m. That rise is linked to increasing wealth in emerging markets, a trend that looks set to continue long term.

Diabetes is a chronic rather than acute illness, and sufferers generally use insulin for their entire lives. Given the variation between different types of insulin, lots of patients tend to stick with a particular brand for decades.

But the pharmaceutical industry has faced intense criticism in recent years over prices. Particularly in the US, uninsured patients can face huge costs and the sector has become a bit of a political football. The group’s got several affordability initiatives and that’s already putting pressure on margins. The US still accounts for around half of sales – so a politically motivated crackdown on the industry would be bad news.

Fortunately, we think Novo has opportunities in other geographies and outside insulin.

International sales grew at 11% last year, compared to 1% growth in the US. However, the real opportunity in our view lies in the group's newer GLP-1 products.

These drugs stimulate the body to produce more insulin after eating, reducing the need to inject insulin straight into the body and the associated chances of complications. Sales of this category of drug have been impressive and helped Novo gain a 28.6% share of the global diabetes market, a figure which looks set to continue growing. The group’s also developed new obesity treatments, and although sales are low at present the most important, Saxenda, is growing quickly.

A dominant market share and attractive end markets would be enough to attract investors' attention on their own, but Novo also runs a pretty tight ship operationally. Operating costs have risen more slowly than revenues despite new product launches – typically an expensive time for drug companies. That supports operating margins a little below 45%, and the group’s net cash position supports a modest 2.2% prospective yield.

Novo Nordisk - revenue and operating margin

Source: Refinitiv 6/3/20

Scroll across to see the full chart.

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Mowi – moving up the food chain

When considering overseas companies for investment, one of our personal criteria is that it must offer something we can’t get at home. To accept the extra costs and currency risk we want something special.

Mowi fits the bill nicely. The Norwegian group is the world’s leading-producer of farmed salmon, and we think that’s a good place to be.

With the total wild fish catch rising only very slowly in recent years, we’re turning to aquaculture to put fish on our plates. A combination of growing populations and more seafood in our diets, means the scale of fish farming will need to increase dramatically if it’s to keep up with demand.

World fisheries and aquaculture production (million tonnes)*

Source: FAO, 21/02/20

Scroll across to see the full chart.

*Excludes marine plants and mammals

The turn towards more environmentally-friendly sources of protein is also helpful. Fish is far less carbon intensive than meat, although no intensive agriculture is completely free of environmental cost.

While revenues and margins are heavily impacted by the market price of salmon – which is out of Mowi’s control – the group has also moved into fish feed and consumer products. That’s helped it keep a lid on costs, while also giving the group a greater share of the value chain.

Operating profit margins are expected to hover around the 20% mark over the next few years, with revenue growth in the mid-to-high single digits. However, branching out into new products has led to significant investment in recent years, including a new fish food factory in Scotland. That’s weighed on cash conversion at times and also dividends. This is because the dividend policy states that it will pay out 75% of cash after operational and financial needs are met.

Top of the list of ‘needs’ is maintaining a healthy balance sheet. Fortunately, a forecast net debt to EBITDA ratio of only a little over one last year is fairly moderate. As a result analysts expect the company to deliver a prospective yield of 4.9% this year. Remember though that all yields are variable and aren’t a reliable indicator of what you’ll get in the future.

See the latest Mowi share price, charts and how to trade

A.G. Barr – the benefits of an IRN will

Regular readers will be familiar with IRN-BRU maker A.G. Barr. We’re long term fans of the company, and after a period with higher share prices the company’s price to earnings ratio is starting to look attractive again.

Sales of consumer goods, like IRN-BRU, tend to hold up fairly well even in a downturn. No matter what the economy’s doing, people should still pick up a can of their favourite beverage. In fact the famous orange drink is so popular it’s one of only a select few to outsell Coca-Cola in its home market.

Another thing to keep in mind is the group controls a lot of its own production. That should help it manage supply chain disruption. With increased economic uncertainty and the unknown impact of coronavirus, we think that’s a real positive.

It’s not all been smooth sailing though. When the UK sugar tax was first introduced in the UK, A.G. Barr chose not to pass on the extra cost to its customers – it tried to gain market share. Since then, the company’s started to try and increase its prices to reflect the tax. But that’s proved a challenge – as customers didn’t take well to the hike. Earnings per share are expected to fall 18% this year.

To the group’s credit, things seem to be stabilising, and margins are re-inflating. However, we think A.G. Barr is a company where a long-term view really pays dividends.

It helps that A.G. Barr is a family affair. The Barr family owns over 20% of the IRN-BRU maker’s shares, and two of the three individuals who know the top secret IRN-BRU recipe bear the Barr name. We think that adds to the group’s defensiveness. Family ownership tends to mean there’s a desire to protect inter-generational wealth, and means management takes a very long term view.

A conservative approach means the balance sheet’s in good health, with a net cash position of £13.4m expected this year. That helps underpin a prospective yield of 3.4% and an excellent dividend track record. As ever though, these aren’t guaranteed.

A.G Barr dividend per share

Source: Refinitiv 6/3/20

Scroll across to see the full chart.

It’s too soon to tell if A.G. Barr has all of its sparkle back, and the market remains challenging. But we are still long-term believers.

See the latest A.G. Barr share price, charts and how to trade

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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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