Do you invest for growth or income? Investors looking for growth use a share’s true value to determine whether it should be added to their portfolio or not. If a share is undervalued it appeals to the growth investor – and when the share price rises to, or exceeds, this true valuation it can be a trigger to sell some or all of the stock.
Morningstar equity analysts use their research to determine a share’s Fair Value, and from this they award it a star rating. A stock with a five star rating is trading at significantly less than its Fair Value – and one that has been awarded one star is considered by analysts to have a share price much greater than the Fair Value estimate.
There are no one-star stocks trading on the UK stock market, but there are several two-star stocks. Some of these pay an attractive dividend, and so may be held in a portfolio after their share price has risen. The five stocks below have been awarded a two-star rating, which could be a trigger for investors to consider trimming their position and taking some profit.
Sage (SGE)
The Sage Group is a global supplier of accounting and business management software. The firm caters primarily to the needs of small to medium businesses; about 80% of its clients have fewer than 25 employees. Sage has more than six million customers worldwide, employs 13,500 people, and generates more than £1.3 billion in revenue. The company was formed in 1981 and was floated on the London Stock Exchange in 1989.
Smith & Nephew (SN.)
Smith & Nephew designs, manufactures, and markets orthopedic devices and wound-care solutions. Approximately three fourths of the U.K.-based firm's revenue comes from knee replacements, hip implants, nails, fixation devices, and arthroscopy tools. The remaining 25% of revenue is from the wound therapy segment. Roughly half of Smith & Nephew's total revenue comes from developed European and Asian markets, 40% is from the United States, and emerging markets account for the remainder.
TUI Travel (TT.)
TUI Travel is a UK-based global tour operator that generates revenue by selling tour packages and travel products, including hotels and cruises, through operations in 31 source countries. Tour packages sold to European travelers accounted for over 85% of revenue.
Reckitt Benckiser (RB.)
European firms Reckitt & Coleman and Benckiser combined in 1999 to form Reckitt Benckiser. The firm's products include a variety of household product and personal-care brands, such as Calgon, Lysol, Finish, and Mucinex, many of which have the number-one or -two position in their categories. More recently, Reckitt has expanded the categories in which it competes by acquiring SSL International and Schiff Nutrition. The firm operates in 60 countries and sells products in more than 200, garnering just north of 40% of sales from emerging markets.
Hikma Pharmaceuticals (HIK)
Headquartered in Jordan, Hikma manufactures and sells generic pharmaceuticals. It operates under three divisions: branded products, injectables, and global generics at nearly 50%, 40%, and 10% of sales, respectively. Approximately 55% of sales are located in the Middle East and North Africa, making it one of the largest pharmaceutical companies in this region. Remaining sales are based in the U.S. and Europe.
We used Morningstar Select to screen UK equities by one and two star ratings
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