For decades, consumer goods manufacturer PZ Cussons (LSE: PZC) was a reliable growth stock. But over the last five years, its fortunes have reversed. Revenue and profit are in decline and the coffers are depleted. In 2018, PZ Cussons sharply reduced capital expenditure and did not increase the dividend for the first time in many years. It kept the financial screws tightly turned in the year to May 2019 too.
The company’s problems are both self-inflicted and the result of external events. It borrowed to buy brands that have been less profitable than expected. In developed markets such as the UK and Europe, brands face increased competition on two fronts: the internet, where consumers have much more choice; and discount retailers, who have developed their own copycat products. In Nigeria, until recently one of PZ Cussons’ biggest markets, the economy has been rocked by low oil prices and internal conflict. The company is profitable but contracting and last week it dispensed with its longstanding CEO. It has yet to appoint a replacement.
That’s the bad news. The good news is that PZ Cussons is committed to restoring its fortunes by selling off weaker brands and rationalising in Nigeria. It is ploughing the money from disposals and the savings from efficiencies into stronger brands, typicallypersonal care and beauty brands such as Imperial Leather soap and fake tan St.Tropez. The plan is to improve the products, differentiating them from copycats and competitors, and sell them in more countries.
PZ Cussons’ share price of 192p is half its historical high in 2013. In one sense that too is good news. The collective gloom may mean the shares are undervalued on an enterprise multiple of about 12 times adjusted profit. On the other hand, there is no telling when six years of negative share price momentum will reverse. This idea, then, is for patient long-term investors only.
I’ve had a storming run in my portfolios from my most overweight sector: warfare (22% of our family funds) or for squeamish investors, defence. Great performers include America’s Raytheon (missiles), Germany’s Rheinmetall (best tanks in the world) and the UK’s Chemring, QinetiQ and Cobham (about to delist after a successful takeover bid).
Yet among these winners has been the mangiest of dogs. In 2009 I invested at £5 per share, confirmed my brilliance as it rose to £13 in 2014 then stupidly gawped as it fell to £4.50 by the middle of 2019 as management blundered around.
I intend to double up soon, not always the smartest advice for losers but in this case I am sure that “The Force” is with me. And the company? Babcock International (LSE: BAB), a truly global defence group with 70% of sales from overseas. It builds or participates in almost everything from nuclear plants to frigates, submarines, aviation and systems management. Profits are evenly spread across its land, sea, air and nuclear operations.
The compelling numbers include a forward multiple for 2020 of a mere nine times and a 5% dividend yield. Debt is low and it trades at a smidgeon above its book value. The order book is a robust £18bn and the relatively new chair, CEO and other key appointees seem sensible.
There are actually four “Forces”. Western governments have woken up to the often lamentable state of their armed forces so defence budgets are rising; the ever-nihilistic and opportunist Russian government is a clear threat and China’s remorseless expansion of its armed forces is another; while the reliability of America as an ally is in doubt.
In 2019 takeover approaches were made by a private equity firm and the outsourcing group Serco. With a market capitalisation of only £3bn it is vulnerable; if it stumbles again it will be gobbled up. What’s not to like?
Think “technology” and the companies that spring most to mind are the likes of Facebook, Amazon and Google. Their success has attracted so many investors that they’re what market commentators sometimes call “crowded trades”. But while everyone is focused on the leaders, other stocks in a sector can be overlooked if not ignored altogether. And this is where opportunities can lie. One area is “legacy” tech. These are the big names of yesteryear, unloved today because they have been dismissed, rightly or wrongly, as “ex-growth” think Intel, Cisco, Oracle and SAP, for example.
One to watch in 2020 is IBM (NYSE: IBM). It’s slowly declining as companies switch to the cloud and other new technologies and it hasn’t kept up. But it’s making up for lost ground to get back on a growth track. This year, to turbo-charge its cloud computing presence, it paid $34bn for Red Hat, a well-regarded specialist that has been growing earnings at 25% annually.
It’s already adding profit to IBM’s bottom line and it’s hoped this will accelerate next year as it sells into IBM’s considerable network of existing relationships in the US and internationally.
Alongside rationalising operations and selling off non-core businesses, IBM is likely to appoint a new chief executive in 2020. Choosing Red Hat’s Jim Whitehead, which would underline the group’s new direction, would be well-received and help further revitalise investor interest.
It’s early days but the current price/earnings ratio of just ten for an established, highly cash-generative global tech company making a push into one of the sector’s fastest-growing segments is far from expensive. From these levels it won’t take much in the way of positive news to give the shares a significant boost as the year progresses. Meantime, unlike most tech stocks, the downside looks limited given the big dividend yield of nearly 5% providing support.
I’m so convinced this is going to be a big theme not so much next year as over the next decade that I’ve actually set up a holding company to invest in it: Cypherpunk Holdings (CSE: HODL). That theme is privacy.
You might tell your lover something you wouldn’t tell your lawyer, or your doctor something you wouldn’t tell your mate. Yet information about what we read, watch, say, buy or sell online gets used for purposes beyond the original one. As the saying goes: “When the internet is free, you are the product”.
That information is then used to shape behaviour and influence your decisions; to determine the content you receive what you do, see, read or watch; to sell things to you; and to make decisions about you the loan, the insurance or the job you are offered. In the wrong hands, it could be used against you in some way, perhaps even to spy on you. Your data could be stolen.
Only now are people starting to wake up and think about this. Regulators have taken steps, but technology is so advanced it has often moved on before any new rules are emerge. We have little idea what is being used, how or by whom. We have little say in how it is used. We have no power to object, nor any ability to amend our data. We have very little control over it. The default setting of the internet is zero privacy.
The solution is privacy technology. Protecting our privacy limits the scope others have to use our information beyond the purpose for which it was supplied. It allows greater control over our online reputation. It enables us to explore new ideas outside the mainstream, without fear of being watched. Those that know about us have power over us. Protecting privacy limits that power.
Cris Sholto Heaton
The crisis in Hong Kong over the last nine months has caused long-term damage to the territory’s reputation. Its status as Asia’s financial capital is no longer so secure: companies will consider other locations for their regional headquarters and wealthy individuals will think about stashing their assets elsewhere.
Singapore has the most to gain from this: it’s a major financial centre that offers the stability its larger rival conspicuously now lacks. Any medium-term shift out of Hong Kong will benefit the Singapore office market, where rents are already recovering from a glut of new supply in 2016-2017. So this seems a good time to look at the local commercial-property real estate investment trusts (Reits).
These offer a decent long-term income at a time when global interest rates are set to fall again another factor likely to help buoy their share prices over the next year. I hold Capitaland Commercial Trust (Singapore: CCT), which yields around 4.5% at a price of S$1.97. This conservatively-run Reit is the largest in its sector with around S$11bn in assets and reasonably low gearing (35%). The portfolio is mostly good-quality offices in Singapore (with around 22% in Singapore retail and hotels, and 8% in Germany) that should deliver a steadily growing income as rents rise.
My suggestion last year was TKH Group, a Dutch industrial-technology firm. When I picked this, the price was around €41.70 and, at time of writing, it is €48.6 including the dividend, that’s a return of around 19% before costs. I still like TKH’s mix of businesses, but half-year results were soft and guidance for full-year results was trimmed in November. A forecast price/earnings ratio for 2019 of just under 19 would be okay if all was going well, but looks vulnerable to disappointment now. Take profits.
The UK small-cap trusts I recommended for 2019 struggled for most of the year but are enjoying a year-end rally. They should do well in 2020 but so should equities in general, leaving investors spoilt for choice. After minimal progress in 2019, earnings growth should accelerate in 2020, though this is largely discounted in US valuations.
It may be time for the rest of the world to catch up. After the persistent outperformance of growth over value, value investing has made a modest comeback in recent months. It’s tempting to back the new trend but it has quickly turned from a contrarian to a fashionable call.
As Dudley Moore’s character said to the RAF recruiter in the Aftermyth of War sketch in Beyond the Fringe: “Please. Sir, I would like to join The Few.” “I’m sorry,” came the reply, “there are far too many.”
The high growth US technology giants may be due a pause but that doesn’t mean that more moderate growth stocks won’t continue to perform well. Two global trusts fit the bill well. They are both growth- orientated but have their feet firmly on the ground: the Monks Investment Trust (LSE: MNKS) and the Mid Wynd International Investment Trust (LSE: MWY).
The former is the stable-mate of Scottish Mortgage at Baillie Gifford, the latter a former Baillie Gifford trust now managed by Artemis. Performance over one, three and five years is similar and excellent but Mid Wynd, with a market value of £250m, is much smaller.
This may enable it to be nimbler in the stockmarket should there be a need to rotate the portfolio. The shares of both trade at premiums to net asset value (you get what you pay for) and both have low dividend yields. Neither will shoot the lights out but nor will they give you sleepless nights. Given my record in 2019, you may not need to jump in now.
Think of some of the great investors’ calls. Soros shorting the pound, perhaps, or the hedge funds that spotted flaws in subprime. They all involve identifying a market anomaly something that looks unsustainable over the long-term and then betting against it continuing. At present there is a 700-mile-long anomaly in the Andes mountain range Ecuadorian mining.
As Francisco Pizarro and his fellow conquistadores could have told you almost 500 years ago, the Andes is crammed full of gold, silver and copper. That’s why we’ve seen large mining industries develop in Chile, Peru, Bolivia and Colombia. But not in Ecuador.
That wasn’t because of a lack of mineral resources. Despite the limited exploration more gold and copper has been found in Ecuador than anywhere else in the world over the last 15 years.
Instead, a combination of social and economic factors an abundance of oil, poor infrastructure and political instability all played a part meant Ecuador never developed a large-scale, modern mining industry. That anomaly clearly couldn’t last forever. In recent years successive governments have improved conditions for international miners and in 2019 Ecuador’s first-ever world-class mine began operation.
But this is just the beginning of the Ecuadorian mining boom. Twelve of the world’s major mining companies have already set up offices in Ecuador and several more large projects will come onstream over the next few years. Of course, there will be hiccups on the way. Ecuador remains a politically volatile country, prone to protests.
Yet, over the long run, mining is bound to grow in Ecuador. It has the mineral resources. And as the country’s politicians slowly get used to the extra tax dollars generated by mining, while increasing numbers of Ecuadorians find work in the labour-intensive industry, it will follow its Andean cousins in developing a serious mining industry.
In Peru and Chile, mining accounts for between 15% to 20% of GDP. If Ecuadorian mining grows to even half that size it will create huge wealth for investors. Fortunately for us there are two companies that give us a direct way to get in early on the story.
One is Lundin Gold (Toronto: LUG), which built and operates Ecuador’s first large goldmine, while the second is London-listed explorer SolGold (LSE: SOLG), which has the country’s most exciting portfolio of projects to develop.
This time last year I tipped what I thought was a very dull stock indeed high street clothing retailer Next (LSE: NXT). I saw it as a potential recovery play amid panic over both Brexit and the annual “high street bloodbath” headline frenzy. “I don’t expect it to shoot the lights out,” I said. I was wrong. It’s up by about 75% since the tip on 28 December. I can’t claim that all of my tips do that well (no, please don’t write in to remind me of just how true that statement is), but I hope you acted on this one. If you did, then I don’t expect it to repeat the feat this year but I’d hang on to it it’s a retail survivor and a quality stock.
So what about this year? Sticking with retail, I’m tempted to take a punt on a turnaround at Marks & Spencer (LSE: MKS). Unlike Next, M&S has had a terrible year, because unlike Next, M&S is not a terribly good company. The share price is down by about 7% in the past 12 months, while the wider market is up about 11%. M&S is a perennial turnaround stock, with a long history of disappointing. But even if current chairman Archie Norman can’t salvage it, the fact that the political uncertainty is now lifting in the UK (see page 8) makes me think that even a duffer like M&S will be lifted in the rush for exposure to UK plc. And in this age of activist investing, there’s surely a price at which a professional troublemaker decides it’s time to take a pop at the venerable brand.
The other area where I think we’ll see surprises next year is the oil sector. The oil price has been noticeably subdued this year, caught between the narrative of over-supply (too much fracking) and weak demand (recession scares). If global demand is better than expected next year, and oil cartel Opec sticks to its production cuts (partly with the aim of propping up the valuation of state-owned oil giant Saudi Aramco), then oil could spring a nasty surprise on markets by heading higher. That, in turn, could be good news for energy companies which have struggled this year. So on that front, I’m going to go for another very boring stock oil major BP (LSE: BP), which is down about 6% over the past year (so roughly flat after the dividend). It’s currently yielding around 6.5%.
Many of the funds I closely follow had a good last year but two stand out as relative laggards and might therefore present some opportunity over the long term. One is Phoenix Spree Deutschland, a specialist London- listed residential property company focused on the problematic Berlin market. I will take a closer look at it early next year.
The idea you should concentrate on now is an unashamedly long-term play for the patient growth investor. Its a trust called Syncona (LSE: SYNC), which is the UK’s premier quoted life sciences venture capital (VC) investor. This is a world-class outfit with an excellent track record of realisations in businesses involved in the front line of biomedical research.
Biotech stocks have slipped over the past few months and that has been a reason why the share price of this VC fund has weakened considerably; at various points its looked like it might breach the 200p level. Looking at the most recent results, the net asset value of the fund was just under 200p a share, so at the current price you’re not paying too much of a premium.
That reasonable pricing is because recent results showed that the portfolio had lost just under 12%, largely because of the share price decline of quoted companies Syncona holds Nasdaq-listed Autolus, for instance. Many biotech and genomics businesses have seen significant deratings in the last few months.
That said, some of the businesses in the portfolio showed significant uplifts on valuations, notably Blue Earth Diagnostics and Achilles Therapeutics. Over the next ten years, Syncona aims to build a portfolio of 15-20 companies.
The idea is to add two or three every year in its strategic areas of focus, including cell and gene therapy. I am sure the share price will be volatile on that ten-year journey but for growth investors who aren’t in a rush there is no better way of buying into private lifesciences VC.
Biotechnology is a major growth area of the 21st century. It is driving revolutions in new biologic drugs, diagnostics, crops and farm-animal genetics. That is why I recommended a drug discovery biotech Vertex Pharmaceuticals for 2018 and a “picks & shovels” antibody company Abcam for 2019. Vertex is up 41.2% since my recommendation in early January 2018, while the FTSE 100 has lost 5.5%. Abcam is up 30.3% from December 2018 compared with a 9.2% increase in the FTSE 100.
I am staying with biotech for my 2020 recommendation and selecting a biotech with the world’s largest antibody library, which it is using to generate new antibody drugs (those that stimulate the immune system). Some are developed in partnership with big pharmaceutical companies with a royalty taken on sales, while others are developed internally to retain more of the profits. The company is MorphoSys (XETRA: MOR) and it has a well-stocked pipeline with over 100 distinct drugs in R&D and over 70 clinical trials in progress. It has 12 big pharma partners including GSK, Johnson & Johnson, Novartis, Pfizer and Roche.
MorphoSys has just one drug on the market: Tremfya, for plaque psoriasis and psoriatic arthritis. It has partnered with Johnson & Johnson in this case. Tremfya is in ten late-stage trials for related conditions. Meanwhile, MorphoSys is preparing to seek regulatory approval for its most advanced proprietary drug tafasitamab for blood cancers. Excluding these two drugs, there are another 34 late-stage clinical trials in progress, including tests of an Alzheimer’s drug.
MorphoSys is still loss-making with a net loss of €52.7m for the first nine months of 2019 on sales of €61m. But its healthy cash pile of €412.4m should see it through to profit. The main risk is of late-stage clinical trial failures, which delay profitability and require the raising of extra funds. The share price is around €127, up 43% from €90.50 at the start of this year. Buy.
Andrew van Sickle
People always vote with their feet, so I was struck by last week’s news that the 2.5 million-strong Polish diaspora is beginning to return home: the number of Poles based abroad dropped by 85,000 last year. You can see why. Last year Poland became the first country from the region to be ranked a developed market by index provider FTSE Russell, a testament to its progress since the collapse of the Soviet bloc. It has been growing non-stop for over a quarter of a century, and over the past few years GDP has expanded by 3%-6% a year.
But there should be plenty more to come. Like the rest of the region, Poland is still converging with the wealthier part of the continent. Its GDP per capita is still around $15,500, compared with Germany’s $40,000. Eastern Europe is dependent on the eurozone’s business cycle, but Poland is less so than most. Exports comprise just 50% of GDP, compared with 78% for the Czech Republic. Its large domestic market tempers the impact of a continental or global downturn; Poland was the only EU country to avoid a recession in 2008-2009. With unemployment at just 3.2% and household debt a mere 35% of GDP Britain’s is 84% there is ample scope for consumption to grow for years to come.
One potential problem to keep an eye on is the country’s government, whose authoritarian and statist instincts have unnerved investors. So far, however, the ruling Law and Justice party seems to have had little impact on the population’s dynamism and entrepreneurial instincts. In any case, the danger is arguably priced in. Poland is on a cyclically adjusted price/earnings ratio (Cape) of just 11, making it one of the world’s cheapest stockmarkets by this measure. It doesn’t deserve to be. That makes the MSCI Poland UCITS ETF (LSE: IPOL) worth tucking away.