Hobson: It's Never Been Harder to Pick Shares

THE WEEK: Morningstar columnist Rodney Hobson says that the volatile market creates buying opportunities - but finding them is easier said than done

Rodney Hobson 19 February, 2016 | 12:47PM
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Although the volatile market creates buying opportunities, I feel that it has never been harder to pick shares to invest in than it is now. Many companies that previously seemed solid, particularly in oil and other natural resources, are still under the cosh because they already have cut their dividend or are likely to do so this year.

As a consequence, there has been a flight into those companies that continue to prosper, which means that spotting an undervalued high quality share is particularly difficult.

This thought sprung to mind when consumer goods producer Reckitt Benckiser (RB.) announced results for 2015 this week. Revenue and pre-tax profits edged up only slightly, it is true, but the figures were affected by adverse foreign exchange movements.

The underlying figures were strong, with like-for-like sales up a highly creditable 6%. Reckitt aims to add another 4-5% this year. Healthcare fared particularly well, boosted by the acquisition of SSL, which seems to be working out well. However, the focus quite rightly is on organic growth with Reckitt unwilling to overpay for acquisitions.

The big detraction for anyone thinking of investing is that the shares are quite expensive above £65, having surged to a new peak since the results. They have more than doubled over the past five years in what has been a pretty steady rise.

The yield is only a little more than 2%, based on the maintained dividend of 139p, and the forward price/earnings ratio is just over 25. However, in this market there is a lot to be said for quality, especially if, like me, you are investing for the long term.

Sin Stocks Divide Investors

On the whole I am not an ethical investor, mainly because you can take exception to most companies on moral grounds but also, I admit, because reducing your options cuts a lot of promising prospects out of your portfolio.

Thus I have a longstanding holding in Imperial Brands (IMB) despite having never smoked myself. It has troubled my conscience from time to time, but never to the point at which I felt compelled to sell.

I have, however, drawn the line at arms makers, perhaps irrationally. Every time BAE Systems (BA.) produces excellent figures I waver a little. Despite delays in gaining orders from the Middle East for the Eurofighter Typhoon aircraft, BAE saw sales overall rise strongly last year and it will benefit further in 2016 from any pick-up in defence spending.

Yet the shares trade on a P/E of only 13 and the yield is about 4%, which is better than average. If you are less queasy than I am, it looks a solid investment below its 12 month high of 547p.

Racy Retail Stock

I couldn’t help noticing that Paula Minowa, who has been appointed chief operating officer at staid men’s clothing chain Moss Bros (MOSB), formerly worked as managing director for the somewhat racier retailer Ann Summers.

An interesting career move but it certainly needs someone with imagination to liven up the somewhat more staid image of Moss Bros, which never quite came to terms with the decline in hiring formal wear. She has wide retailing experience in the UK and overseas and could prove an inspired choice.

Sales at Moss Bros were up solidly in the first half to the end of January and so was revenue from hiring so Minowa may be coming in at just the right time. The shares trade at around 100p, smack in the middle of the 90-110p trading range over the past year. 

They offer a decent yield although I worry a little about the low dividend cover. This is a speculative punt that offers all the excitement of a purchase from Ann Summers.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
BAE Systems PLC598.00 GBX0.17Rating
Imperial Brands PLC1,736.00 GBX0.29Rating
Reckitt Benckiser Group PLC6,426.00 GBX-0.28Rating

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.