We look for companies that score well on quality metrics and where analysts have been upgrading earnings forecasts
Thursday 01 Apr 2021 Author: Steven Frazer

The 5 April deadline for people to use up this year’s £20,000 ISA allowance is fast approaching. To help investors who are looking for last-minute ideas, we’ve scanned the market for good opportunities that can be added to ISA portfolios. The beauty of ISAs is that any capital gains and dividends from investments inside the account will be tax-free.

Investors will struggle to get even 1% from a Cash ISA, but the stock market could do better so take advantage of a Stocks & Shares ISA. The caveat is that you need to understand that the value of investments can fall as well as rise.

The stock ideas in this article are sourced from a longer list of companies experiencing positive earnings momentum. In plain English, that means analysts have increased their future earnings estimates for these companies over the past three months.

Earnings upgrades have historically been one of the strongest catalysts for a share price to rise.

THREE STOCK PICKS

From our list, we believe BHP (BHP), Halfords (HFD) and
Taylor Wimpey (TW), are standout options for investors
to tuck away in an ISA.

Not only are these three stocks seeing rising earnings expectations, but they also have decent track records on quality metrics, such as return on capital employed and return on equity.

These measures track how well a company invests its cash to create value for shareholders, and how much profit investors get for their investment, respectively.

We have long considered BHP to be the pick of the UK mining sector, thanks to its operational excellence and large exposure to commodities like iron and copper, which are both seeing a demand surge as the global economy recovers from its pandemic hangover. BHP has averaged return on capital employed of 13% and return
on equity of 12% over the past five years.

In February, BHP hiked its half-year dividend by 55% after profits in the six months to 31 December hit a seven-year high of $9.75 billion as iron ore prices soared amid signs of a new commodities super-cycle.

PEDDLE POWER

Bike and car parts retailer Halfords has been a lockdown winner as consumers found a new love of two-wheeled peddle power. Bike sales have been very strong, and we expect a repeat of this trend in 2021.

Fund manager Alex Wright, who runs the Fidelity Special Values (FSV) investment trust, is a big fan of Halfords and its near-12% average return on capital employed and return on equity over the past five years, and the stock is one of the fund’s top 10 holdings.

PROPERTY PLAY

Housebuilders have been in vogue following the stamp duty holiday handed out by Rishi Sunak in 2020 and a Government guarantee on 95% mortgages more recently, playing into Taylor Wimpey’s hands.

Annual house price growth has been supportive, with average selling prices rising to 6.9% in February, according to Nationwide. That paved the way for a record high average UK property price of £231,061.

Taylor Wimpey’s return on capital employed and return on equity have both averaged 17% over the past five years.

BE SELECTIVE

Some stocks with earnings forecast upgrades have weak track records on quality metrics.

Companies like Netcall (NET:AIM) and Kape Technologies (KAPE:AIM) score poorly on both metrics over the past five years.

Hefty borrowings are also a potential red flag and in some cases debt holders appear to be calling all the shots. Private hospital group Spire Healthcare (SPI), for example, has more than £1 billion of net debt at the end of 2020, and analysts still think debt will be 25% larger than shareholder equity by the end of 2021.

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