10 reasons why our Great Ideas are shooting ahead

There has been a significant amount of news flow in recent weeks linked to our top stock tips
Thursday 16 Feb 2017 Author: Daniel Coatsworth

Major events in 2017 have fuelled our running ‘Great Ideas’ stock selections, as well as our ‘10 for 2017’ annual share portfolio.

Acquisitions have certainly been on the agenda for many of our preferred stocks. Other catalysts have been trading updates and broker commentary.

FTSE 250 chemicals group Elementis (ELM) is to boost the size of its personal care business with the $360m acquisition of SummitReheis. This will give Elementis a strong position in the antiperspirant market as the target business provides critical components for this $13bn industry with customers including Unilever (ULVR), Proctor & Gamble (PG:NYSE) and L’Oreal (OR:EPA).

ELEMENTIS - Comparison Line Chart (Rebased to first)

The deal is expected to be earnings and free cash flow accretive in the current financial year. The real kick to earnings should come in 2018 with broker N+1 Singer upgrading its earnings per share forecast by an impressive 15% to take into account a full year’s contribution from SummitReheis.

Elementis is up 30% to 304.8p since we said to buy in November 2016. We believe the shares have much further to rise.


Shares’ Great Ideas:

+15% average gain*

FTSE All-Share: +10.3%**

*12 months to 13 Feb 2017
**over same 12 month period in which our trades were/are live


RECKITT’S BIG MOVE

We’re supportive of Durex-to-Cillit Bang brand owner Reckitt Benckiser’s (RB.) $16.6bn acquisition of US baby formula maker Mead Johnson (MJN:NYSE).

The acquisition shifts Reckitt further into higher margin consumer health where infant nutrition is a category with low price elasticity, high barriers to entry and strong profitability. It also brings the Enfa family of brands into the fold and expands Reckitt’s presence in developing markets, principally China.

Full year results (10 Feb) were solid; like-for-like sales were up 3%, gross margins in expansion mode and the dividend raised 10% to 153.2p.

TOP QUALITY SELECTIONS

Howden Joinery (HWDN) is an ‘extraordinary stock at an ordinary price’, proclaims investment bank Liberum. We are inclined to agree, having said to buy at 368.9p on 26 January in light of unjustified share price weakness. Liberum says the market is overestimating risks to the business and underestimating its strengths. The shares currently trade at 408.8p.

A strong third quarter update and an interesting acquisition have helped to drive up shares in cyber security business Sophos (SOPH) over the past week. The shares are now up 22.6% since we said to buy in July 2016.

Sophos signed up 3,000 new customers for its Intercept X solution in the last three months of 2016. Billings growth across its products increased by 16.1% in the period. There are also signs of better cross-selling, giving an operating profit of £1.7m from the previous year’s equivalent $13.3m loss.

The $120m purchase of Invincea adds next generation malware protection to Sophos’ skill base. We remain big fans of the company.

GOOD NEWS FOLLOWED BY MORE GOOD NEWS

RM2 (RM2:AIM) has had its glass fibre and resin pallets approved by one of the largest US retailers for use by its suppliers. This followed news in late December that low-cost manufacturing had begun in Mexico following a shift from uneconomic operations in Canada. We believe 2017 will be the year when RM2 finally convinces the market it has a credible business, so keep buying at 29.01p.

Our bullish call on British premium lifestyle brand Joules (JOUL:AIM) proved well timed. A strong Christmas trading statement (11 Jan) and superb half year results (31 Jan) acted as catalysts for recent share price appreciation. We’re staying positive on this structural growth retailer for the potential of the brand across multiple channels, in the UK and overseas.

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Gaming logic box designer Quixant (QXT:AIM) had an ‘outstanding year’, according to stockbroker FinnCap, after saying full year results would hit recently-upgraded earnings forecasts. Importantly, management remain as upbeat on the future as ever. An outstanding performer since we flagged its attractions on 20 October 2016 at 285p, the stock now trades at 367.5p.

TIPS OF THE YEAR UPDATES

FTSE 100 service group DCC (DCC) has made its largest ever retail transaction, buying Esso’s petrol station network in Norway for £235m. Analysts believe this will boost group pre-tax profit by 2% in 2018 and by 8% in 2019. The ability to make earnings-enhancing acquisitions in the energy space was a core reason behind choosing DCC as one of our tips of the year.

Capital Drilling (CAPD) is up 22.2% to 61p since we said to buy in December 2016 thanks in part to a very positive trading update (6 Feb). Its rig utilisation hit 59% in December which is nearly twice as much as at the start of the year (34%). This proves the company is benefiting from mining sector resurgence which is central to our ‘buy’ case. Stockbroker FinnCap has lifted its price target to 95p.

The market is reacting positively to non-life insurer RSA’s (RSA) deal to sell £834m worth of legacy insurance liabilities in the UK to Enstar Group. The shares are now up 5.5% since we said to buy in December 2016.

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The Shares team
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