Half of our selections have put up double-digit gains but the losers have sunk further of late
Thursday 07 Oct 2021 Author: Steven Frazer

Despite a fuel crisis, ongoing inflation worries and the end to the furlough scheme, Shares’ top picks for 2021 continue to outperform the wider stock market.

But while the FTSE All-Share index ultimately did very little during the third quarter, adding just 44 points, or about 1.1%, our 12-stock selection continued to present us with successes and challenges aplenty.

Half a dozen of our picks have put up double-digit returns in the three months to 30 September, yet losses from our three worst performers have accelerated, slashing our 28% outperformance over the FTSE All-Share at the half year stage (30 June) to a little more than 5% at the end of September.

The standout performer is now Paris-listed Eurofins Scientific, the world leader in food, biopharmaceutical and cosmetics product testing and environmental laboratory services, following a positive update in August.

RECORD RESULTS FOR EUROFINS

Eurofins posted record half-year numbers, where revenue jumped 40% to €3.3 billion and earnings before interest, taxes, depreciation and amortisation more than doubled (up 104%) to €1 billion, for the €20 billion valued company. That was encouraging enough but word that margins had risen from 21% to 30.3% this year saw the firm substantially raise full year guidance.

‘It appears that the pandemic will drive increasing demand for Eurofins’ services for many years to come,’ commented chief executive Gilles Martin in August.

Meanwhile, the core operations performed well with new product launches in areas such as clinical diagnostics and transplants contributing to overall growth in the first half.

Transport infrastructure and analytics software company Tracsis (TRCS:AIM) also continues to shine, up 53% since our December 2020 article.

The Williams-Shapps Plan for Rail in the UK announced at the beginning of August promises to be a strategic revolution that should provide Tracsis with excellent opportunities to bring its smart, technology-led innovations to all stakeholders in Britain’s railways.

The company had, at the time, just won a significant expansion deal for its RailHub digital platform that allows railway workers to plan and deliver safer work on the network by providing better and more visual information. The new agreement doubled RailHub’s user base to over 30,000 individuals, news that was welcomed by the market.

COVID BOUNCEBACK

Eyewear frames specialist Inspecs (SPEC:AIM) has performed strongly with recent first half results showing that the company is rapidly bouncing back from a Covid horror show, with sales recovering fast and margins being rebuilt.

But of course, we must not ignore the ugly sisters among our picks. Ocado (OCDO) has been something of a dog for most of the year after a strong start to 2021.

Sentiment towards the robotics-led groceries platform wasn’t helped by a robot collision in July which led to a fire at its Erith facility. An incident which will cost the company millions of pounds for repairs and potentially damage its reputation with prospective clients for its out-of-the-box online supermarket offering.

Our healthy gains on BHP (BHP) have evaporated of late for two key reasons. One is the trajectory of metal prices. Concerns about the impact of the Evergrande property crisis and wider Chinese economic malaise on the world’s largest consumer of metals have seen markets like copper and iron ore come under pressure.

Notably China’s policy to force steel production down by 10% between August and December effectively creates a surplus of iron ore globally. The other issue weighing on sentiment is BHP’s decision to cancel its dual-listed company structure, with the result that its shares will have a primary listing in Australia and it will therefore no longer qualify for membership of the FTSE 100.

Assuming shareholders give the green light, this change is expected to happen in the first half of 2022. While mindful of these risks, we think the recent sell-off in the shares means they are largely being priced in and it would therefore be a mistake to sell at this point. There are upsides to the simplification of the corporate structure, not least its ability to use shares in acquisitions.

Also, short-term headwinds for metals demand could soon shift as planned infrastructure spending coming out of the pandemic begins to ramp up.

Jefferies comments: ‘The mining sector has been hit hard by Evergrande and the potential impact on China’s demand for metals. A disorderly downturn would be problematic but appears to be unlikely. A soft landing would be a positive for mining shares following the recent pullback, in our view.’

ALIBABA DISAPPOINTS

Shares in Chinese e-commerce platform giant Alibaba (we flagged the New York-listed ADRs as the way of getting exposure to the stock) remain in terrible shape after a 2021 dogged by a regulatory scythe that has massively impacted everything in the Chinese tech space.

The stock fell further through September on reports that Chinese regulators have ordered Ant Group, which runs the engine behind Alibaba’s popular Alipay payments service, to carve out its lending businesses into a separate entity.

While earnings for the second quarter of its March 2022 financial year are expected to be sharply lower year-on-year, presumably as online shopping eases up now that stores across China are reopening, analysts remain hopeful that the company can reach some sort of deal with China’s authorities.

An agreement could put an end to the current regulatory death by a thousand cuts, and most interested observers are cautiously optimistic about the future.

According to Refinitiv data 45 of the 49 analysts that cover the stock have a ‘buy’ rating. Revenues are forecast to continue their upwards path this year and in the years ahead, while after this year’s dip in earnings (from $65.15 in 2021 to $60.14) strong growth is expected to resume from 2023.

We continue to believe that selling the shares into such a weak market now and locking in heavy losses would be a mistake and that investors should give the company time to negotiate  with authorities. 

Elsewhere, Diageo (DGE) remains a steady performer among our picks, with gains to date of 20% after signalling a strong start to its current financial year and a positive outlook for margins on 30 September.

Investors have also warmed again to the story at language services and language technology RWS (RWS:AIM), with further value still to be extracted from its tie-up with SDL.

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