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Shares’ top picks for 2021: still outperforming after 6 months
Every December Shares selects a group of stocks to own for the year ahead. The selection for 2021 have performed well with an average share price gain of 15.2% over the past six months compared with a return of 11.9% for the FTSE-All Share index.
Although the list isn’t intended to be a portfolio, to calculate the return we have assumed that each holding has an equal weighting.
The hit rate or number of stocks beating the market has been good with seven of the 12 shares delivering a better return than the index.
There are two non-UK stocks on the list, Paris-listed product and environmental testing firm Eurofins and China’s Amazon equivalent in the e-commerce and cloud computing space, Alibaba.
Currency exposure has distracted 0.7% from the performance of our picks over the past six months due to the strength of pound against both the US dollar and the euro.
BEATING EXPECTATIONS IS WHAT COUNTS
Share price performance should be viewed against the evolving fundamentals of the business because the stock market is forward looking. Share prices respond to how well a company is performing against expectations. Just meeting them is good, but it may not be enough to see the shares outperform.
To get an insight into this, we have calculated the change in earnings estimates over the past six months using data provided by Stockopedia and Refinitiv.
Iron ore and copper miner BHP (BHP) has seen a big increase in earnings expectations since we wrote about the stock last December. Analysts’ earnings per share estimates for its 2022 financial year have risen from of $1.96 to $3.42. However, the shares have lagged the index despite the upward march of expected earnings. The company will report an operational review for the past financial year on 20 July, which could act as a share price catalyst.
TRACSIS IS THE BEST PERFORMER
The best performing stock in our selection has been transport infrastructure and analytics company Tracsis (TRCS:AIM).
At the half year results (8 Apr) the company said it was starting to see an increase in new business enquiries across those parts of the business hardest hit by the pandemic, which increased confidence around future growth prospects.
The company was also given a boost by the Government’s recent strategic report on the future of the railways. Tracsis said it was well positioned to benefit from the commitment to greater digitalisation of the railways.
Another high flyer in terms of share price performance has been eyewear frames and optically advanced spectacle lenses maker Inspecs (SPEC:AIM), which has gained 38.7%.
Alongside figures for its 2020 results, the company said the business had performed well during the first five months of the new financial year.
The group continued to win new customers resulting in order books being higher on a like-for-like basis than at the same time in 2020.
The enlarged group now has a worldwide distribution network serving over 70,000 retail outlets which will provide further growth opportunities.
The company said its focus for 2021 will be integrating the companies acquired in 2020 and creating synergies to support growth.
CALLING TIME ON WETHERSPOON
Pubs group JD Wetherspoon (JDW) has been a beneficiary of the pent-up demand in hospitality and the shares have gained 21% since we explained the investment case for the stock in December 2020.
However, the latest Government delay to the removal of restrictions has taken the shine off the reopening excitement and the shares have drifted in recent weeks.
We note a sharp fall in earnings expectations since we originally said to buy, which looks anomalous with the rise in the shares. Back in December analysts were forecasting the company to swing back into profit in the year to 31 July, while that now seems to have been postponed to the 2022 financial year.
Given the disparity between share price and earnings expectations, now is the time to lock in the profit and sell. There is a real risk that many hospitality stocks have rallied too hard and so much future growth is now priced in. That leaves them vulnerable to sharp share price corrections if the strong earnings expected by investors do not materialise.
OCADO AND ALIBABA ARE LAGGARDS
Looking at the other end of the performance spectrum, the most disappointing stock picks have been online retailer Ocado (OCDO) and Alibaba, down 14.6% and 14.8% respectively.
Both shares have been impacted by the market’s shift towards reflation and recovery value plays at the expense of growth shares.
Recent industry data from Kantar showed Ocado taking market share. However, the stock market has been disappointed with a lack of new corporate contracts where Ocado licences its logistics platform to third party grocers. We are confident that Ocado will continue to experience strong growth, so stick with the shares.
Alibaba has been impacted by worries over tightening regulatory scrutiny and increased competitive threats from JD.com and Pinduoduo.
Andrew Cheng, analyst at KGI Greater China Research, believes that regulatory action will have limited impact on the company’s leading position as merchants will maintain their reliance on the firm’s operating platforms.
Despite the concerns we believe Alibaba remains well placed to exploit online growth and digitalisation of the Chinese economy. Keep buying the shares.
NEW CEO FOR RWS
Shares in leading provider of language services and language technology company RWS (RWS:AIM) have risen 6.7% since late December 2020.
The company reported a positive first half to 31 March, ahead of the board’s expectations with adjusted earnings up 12% year-on-year. Trading since then was said to be good, in line with the board’s expectations for the full year. According to Refinitv, analysts have increased their earnings expectations by around 5% since the start of the year.
The company announced that chief executive Richard Thompson would step down to be succeeded by Ian El-Mokadem. The latter brings over 20 years of experience in senior management roles in large and international services businesses, most recently as CEO of V.Group, a leading ship management and marine support services business.
Shampoo to hand gel supplier PZ Cussons (PZC) reported a positive third quarter trading update to 27 February. Analysts’ earnings estimates have moved higher since the update and the market is paying more attention to its turnaround efforts.
Medical products group Convatec (CTEC) has risen 16% in the past six months as elective procedures in hospitals continue to normalise. On 23 June, Numis said it saw the potential for more upgrades to 2021 earnings forecasts as healthcare restrictions ease across the globe and the benefits of past investments begin to be reflected in sustained improvements in organic growth.