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Five shares to watch for 2024

HL’s experts provide five shares to watch for 2024 and beyond.
A 3D graphic in green and navy of the year 2024

Important information - 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.

Our experts have picked five shares for investors to watch in the year ahead.

The most anticipated recession in recent memory still hasn’t happened, and there are signs that central banks are starting to get on top of inflation. Share performance has lately been flattered by particularly strong returns amongst a small handful of stocks whilst others have seen drops. But there’s still a lot of uncertainty around the outlook for shares in 2024 and past performance is not a guide to the future.

As ever, having a spread of investments helps to mitigate some of the risks. For those willing to accept these and some extra volatility that may include building a portfolio of individual shares, we take a look at companies we think have either sector-leading growth potential, or defensive characteristics to help withstand a challenging economic environment.

Investing in individual shares isn’t right for everyone. That's because it's higher risk, your investment depends on the fate of that company. If that company fails, you risk losing your whole investment. If you cannot afford to lose your investment, investing in a single company might not be right for you. You should make sure you understand the companies you're investing in and their specific risks. Ratios shouldn’t be looked at in isolation.

Make sure any new investment forms part of a diversified portfolio. Before trading US shares you'll need to complete a W-8BEN form.

This isn’t personal advice or a recommendation to buy, sell, or hold any investment. Share prices can go down as well as up and there’s always a risk you could get back less than you invest. If you’re not sure what to do, please seek advice.

Information correct as at 21 November 2023 unless otherwise stated.

See how we picked our five shares to watch

If you’re reading our five shares to watch for 2024, you may be wondering how we chose just five out of the thousands available on the market. In this video, Sophie Lund-Yates, HL’s Lead Equity Researcher explains the selection process.
1

Baker Hughes

Ready for the energy transition at any speed

Baker Hughes is one of the largest providers of services and equipment to the oil and gas industry. But it also has one eye on the rapidly changing mix of our energy supplies. It’s seeing strong growth in orders for its new energy business that supports technologies such as green hydrogen and carbon capture. The company is also picking up significant business from the ongoing build-out of liquefied natural gas infrastructure (LNG), where capacity is set to increase by about 70% by the end of the decade.

We think this broad offering leaves Baker Hughes well placed to prosper in whatever shape the energy transition takes. Demand for oil and gas is unlikely to have peaked yet and after an extended period of underinvestment, exploration & development spending is booming. The company expects this trend to continue into 2024. However, geopolitical tensions and oil price volatility are risks to keep an eye on as is weakness in North America.

But it’s the Industrial & Energy Technology division that’s seeing the strongest momentum. This houses the company’s gas technology and new energy activities. The division’s revenue in the third quarter was up 37% to $2.7bn but orders accelerated even quicker up by 84% to $4.3bn, contributing to growth in group orders of 40%. This lays a solid foundation from which to build further growth in revenues. It’s likely to become a bigger part of the business in the next few years, as growth in oilfield services moderates, new energy operations start to scale, and service revenues from the installed base of LNG assets begin to flow. If Baker Hughes gets that right, it should improve margins and revenue visibility.

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Baker Hughes outlook

Source: Refinitiv Eikon 20 November 2023 (A denotes actual figures; E is an estimation)

We’re excited about the growth story emerging at Baker Hughes, which is complemented by a robust balance sheet and impressive cash flows. That’s currently supporting share buybacks and a prospective dividend yield of 2.4% but as with any shareholder returns there are no guarantees.

The valuation currently sits towards the top of the peer group meaning the shares are likely to be sensitive to any potential missteps.

2

Coca-Cola

More market share left to grab

The next entry on this list needs very little introduction. Coca-Cola is a beverage giant, selling its products in more than 200 countries and territories across the world. That’s expected to help revenue and operating profit grow at mid-single digit rates to around $45.5bn and $13.2bn respectively in 2023.

A key thing differentiating Coca-Cola from most other drink makers is its operating model. The group focuses on selling its concentrate syrup, rather than doing the actual manufacturing and bottling. That helps the group to keep a lid on costs and supports its industry-leading gross margins, which hover around the 60% mark.

The real secret formula to Coca-Cola’s success doesn’t lie in a vault. Instead, it lies in successfully aligning its interests with those of its bottling partners. The group does this by having a roughly 20-25% stake in its most important bottlers, with a significant portion of remaining shares typically owned by a single family. This ownership structure helps to align focus on long-term growth, with skin-in-the-game family owners naturally being more patient than public investors.

Coca-Cola’s cemented its position as a dividend king, growing its annual dividend for 61 years in a row. That’s supported by extremely healthy free cash flows, which is why we think there’s room for increased share buybacks. As always any shareholder returns are never guaranteed.

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Coca-Cola's annual dividend

Source: Coca-Cola annual reports (2023* is Coca-Cola’s announced expectation)

But keep in mind that revenue growth’s unlikely to shoot the lights out. Acquisitions could be one way to pick up the pace, but the big risk here is that getting the right brand at the right price is a difficult task. And even if Coca-Cola pulls it off, several years of investment would likely be needed to ramp up production and elevate brand awareness amongst consumers.

The valuation’s come down over the last 12 months, now sitting at 20.8 times next year’s earnings. We think this marks an opportunity to pick up a quality company at an attractive valuation. But investors should remember nothing is immune to ups and downs, especially in the short term.

3

CVS Group

Resilient market at a compelling valuation?

CVS Group is a one-stop shop for pet care. It owns over 500 vet practices across the UK, Netherlands and Republic of Ireland. It also has an online pharmacy, crematoria and diagnostic laboratories. It has annual revenue and underlying cash profits (EBITDA) in the region of £608m and £121m.

Vet care is a resilient corner of the economy. People are prepared to spend on the wellbeing of their pets and will only cut back as a very last resort. But it’s not just about resilience, there are opportunities for growth. The pet boom from the pandemic and the increasing humanisation of our pets paves the way for a higher volume of CVS patients and treatments. The group’s also made a foray into the Australian market which we’re supportive of.

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CVS Group revenue split

Source: CVS Group Annual Report 2023

CVS’ strategy is acquisition-led. It snaps up local clinics and each individual deal is small which reduces risk. The group had free cash flow of £62.9m last year and a balance sheet that’s in good health, giving it the firepower to continue with this strategy.

There is a cloud hanging over the group. The Competition and Markets Authority (CMA) has launched an investigation into the vet sector. This focuses on a crackdown on cross-selling of services between partner practices and a probe on pricing. We remain hopeful that changes will need to be relatively minor, like making group branding more obvious (when CVS buys smaller clinics it currently tends to keep the original branding). Despite this, the group’s market value has been sorely punished to the tune of 29% over the last six months.

We view this as overdone, leaving potential for an increase in value. But investors should be aware that there are no guarantees and the outcome of the CMA’s findings will be the primary driver of sentiment in the short term.

4

Greggs

New products and locations on a roll

Greggs has come a long way from the slightly tired northern bakery cliché. It’s now a real staple in town centres and retail parks across the country, with an improved reputation to boot.

The presence at retail parks is important. An effort to concentrate here allows the chain to better capture footfall which is leaning towards these more convenient locations. Increasing outlets at travel destinations like train stations and motorway services is also a shrewd move and helps lower dependence on the more volatile retail sector. The traditional spots on high streets are also benefiting from a return to more normal life. We’re specifically impressed by Greggs’ product offering.

A revamped and improved menu, together with refreshed stores and growing delivery options all mean it’s able to hoover up demand. It’s more accessible price points means we think it’s well placed to serve people who want to treat themselves even while watching discretionary spending. The food-to-go market is huge too and Greggs has only just started to crack this nut.

Greggs’ revenue has recovered from a nadir in 2020 and is projected to be up a further 18% to £1.8bn this year. In a few years the number of shops is set to hit a huge 3,000. We have no qualms about the balance sheet either.

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Greggs operating profit (£ millions)

Source: Refinitiv Eikon 15 November 2023 (2023 is an estimate)

Growth has been impressive but has started to slow a little. The group’s also been grappling with 9% cost inflation, which is also something to watch, but the group's secured forward cover for food, packaging and energy costs up to early in the fourth quarter - cost visibility in this environment is key. Broader inflation seems to be moving in the right direction too.

A price to earnings ratio of 18.7 means the market has set a high bar and is likely to remain sensitive to even slight deviations from targets. We think the long-term opportunities remain firmly in play, and there’s a 2.7% dividend yield on offer to whet the appetite. As ever, remember no dividend is ever guaranteed and all share prices can go down as well as up.

5

Lloyds

Hidden opportunities in 2024

UK banks certainly aren’t feeling the love right now. Having seen interest income boom over the past year or so in a rising rate environment, things look to have peaked. Add in a cost-of-living crisis that casts doubt over whether borrowers will still be able to repay loans into 2024, and investors are rightly cautious. Even so, there are several tailwinds we see playing out that we don’t think markets have fully accounted for.

Mortgages issued over the pandemic are coming up for renewal at less profitable levels. This will be a headwind into 2024, but should start to tail off toward the end of the year – perhaps earlier. There’s also the structural hedge, used by banks to help smooth the volatility from interest rate moves. It can be thought of as a bond portfolio, as the bank rolls from low-yielding contracts written over the past few years onto higher-yielding ones. This should see income receive a further boost from recent rate rises over the next few years.

Loan defaults have stayed lower than many thought, with Lloyds seeing no real uptick in arrears. That may change, but the economic outlook is starting to show signs of improvement. Lloyds also boasts one of the higher quality mortgage portfolios, which we see as being more resilient than some peers.

There’s a 7.4% forward dividend yield on offer and with a strong balance sheet, potential for further returns via share buybacks too. Of course, no returns are guaranteed.

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Lloyds Banking Group - Price to book value

Source: Refinitiv Eikon

And so, with uncertainty in the air, it may seem counterintuitive to pick a bank for 2024. But sometimes, gloomy outlooks can present investors with an opportunity. UK’s major banks are trading on discounted valuations – we think that offers an attractive entry point. Lloyds is our preferred name given what looks to us like a more robust operation than some peers. That said, there’s a lot going on, so strap in for a bumpy ride.

How to invest in shares

One way to invest for the long term is by using your ISA allowance.

Shares held in a Stocks and Shares ISA aren’t subject to UK income tax or capital gains tax. By saving tax, your money can work harder for you. You can pay up to £20,000 into an ISA this tax year. There’s a 0.45% charge for holding shares in the HL Stocks and Shares ISA, capped at £45 per annum. Tax rules for Stocks and Shares ISAs can change and their benefits depend on your circumstances.

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Published: 11th January 2024