We select three companies we believe have been sold-off too heavily
Thursday 26 May 2022 Author: Steven Frazer

As 2022 began many investment experts were whistling a similar tune; that conditions still look good but the rip-roaring rallies powered by the reopening are history. Growth will ease. Returns will moderate. Risks abound—but so do opportunities.

As we close in on the halfway stage of 2022 investors have the opportunity to reflect, and it’s a good bet that with the benefit of 20/20 hindsight, most would have done things a bit differently. Since 31 December 2021, the S&P 500 is down nearly 19%, Nasdaq is off more than 28%, and even the MSCI World index has fallen sharply, 16.9% as of 19 May.

The FTSE 100 has got off lightly, for various reasons, tracking largely flat (down just 0.8%) over the same timeframe.

Following another brutal sell-off last week, when the Dow Jones Industrial Average and S&P 500 suffered their biggest one-day falls since 2020, and an estimated £40 billion was wiped-off the UK’s biggest 350 companies, analysts are seeing a chance to take advantage of this weakness.


JPMorgan’s mathematical modelling expert Marko Kolanovic is one of these optimists. He believes the US stock market is pricing in too much recession risk, and that equities stand to recover in a big way if it doesn’t materialise.

That seems like a real possibility given that first-quarter earnings continue to grow and seem healthy, according to the note.

‘Equities stand to recover if a recession doesn’t come through, given already substantial multiple de-rating, reduced positioning and downbeat sentiment,’ Kolanovic said.

There are analysts that make a similar argument for the UK equities. ‘It wouldn’t surprise us if the growing Tory rebellion against Boris Johnson, forthcoming tax rises and the continued prospect of tougher Covid restrictions fade into the backdrop and markets fathom the reality of a weakened government increasing gridlock, falling uncertainty appears likely to generate tailwinds, in our view,’ said analysts at Fisher Investments.

‘Human nature often sees through the lens of is this good or bad but our research shows stocks pre-price all widely known and expected events, sapping their power over returns even if they happen exactly as people fear.’

We believe now is the time for investors to start looking for stocks that may have fallen too far, and we have highlighted three to buy now. But it’s possible, we believe, to find more companies where the market’s dismal mood and extreme fear has put share prices at discounts that reflect worst case scenarios, and conversely, offers considerable upside risk to valuations if company revenues and profits outperform lowered expectations.

Take the high street’s favourite baker Greggs (GRG). Earlier this month it warned that ‘market-wide cost pressures have been increasing and consumer incomes will clearly be under pressure in the second half of the year’.

This, the company said, could mean profitability being restricted as the company tries to mitigate the impact of these cost pressures while protecting its famous value credentials. Yet the company also revealed that sales growth, despite slowing, averaged 15.8% in the 10 weeks to 14 May. Greggs also said it had made a good start to 2022 and has a strong pipeline of new shop acquisitions ahead.

After falling 35% this year, Greggs’ stock now trades on an enterprise value to earnings before interest, tax, depreciation and amortisation, or EV/EBITDA, of 8.5-times and a price to earnings multiple of 18.5, its lowest in years. If forecasts prove conservative, the PE would be even lower.

In January (13 Jan) Shares said ‘Greggs is not a buy at this price despite overtaking McDonald’s,’ flagging some big challenges as a new boss prepared to take over. That was at £31.71, but now the shares trade at £21.58.

Magazines publisher Future (FUTR), behind Marie Claire, Ideal Home and a number of popular gaming titles, sits in a similar position after a near-50% share price decline this year, as highlighted by us on 12 May.

We discuss why these shares are now attractive in this article.


But not all heavy share price losers this year warrant investment and investors must tread carefully.

Companies including chemicals firm Croda (CRDA), software company Aveva (AVV) and Pets at Home (PETS), the pet care company, have seen their share prices fall sharply this year as risks to consumer spending, slowing heavy industry investment, stubborn supply chain problems and much else became apparent.

That doesn’t make these bad businesses. Pets at Home is one of Shares’ stock picks for 2022 and we’d expect pet food-to-veterinary services play’s earnings to hold up well thanks to the pandemic-induced boom in pet ownership. But the ugly economic backcloth does make us wonder if things could get worse before they get noticeably better for other names.

The market’s bleak mood also comes with its own risks. Investment manager Liontrust Asset Management (LIO) has more than halved from £23.50 last August to £10.32, and while we continue to admire this high-quality fund manager, outflows of £0.4 billion in the quarter to 31 March 2022 amid growing investor nervousness makes us wary.

Similarly, Watches of Switzerland (WOSG) reported a 40% surge in sales to a forecast-beating £1.24 billion on 18 May 2022 with bumper revenue growth of 48% in Q4, seemingly confirming that well-heeled and aspirational customers continue to spend on quality brands.

Yet the shares have fallen 40% this year to 919p, with investors apparently unwilling to extrapolate these strong trends into the future, for now anyway, despite considerable growth opportunities overseas.

Other companies are facing company specific issues alongside macro ones, such as engineering design software company Aveva, which is in the process of accelerating its shift from term licenses to a software-as-a-service subscriptions model and expansion beyond its key energy markets. This should be a plus in the long-run, creating more reliable ‘sticky’ revenues from a wider spread of industries, like renewables.

Ashtead – an expert view

Ashtead (AHT) is a player in an attractive market. Its scale allows it to procure equipment at the best prices and its depot density reduces logistics costs and ensures very good availability. It has a very good digital proposition which the ‘mom and pop’ operators cannot compete with. So, if you want an excavator, you want to ensure the kit is there, it is clean and in good condition. Ashtead has that quality. The market is seeing secular growth as corporates really recognise the benefits of a shared economy. One of Ashtead’s mini excavators at normal utilisation rates replaces the need for 10 owned assets. If you are a big company looking to reduce your carbon footprint, it’s a no brainer.

Biden’s infrastructure plan has got bogged down. Mortgage rates in the US have also done a moon shot and Ashtead is simplistically seen as related to housing. This is also a company whose share price has gone from left to right in almost a straight line and would have been affected by the market de-risking this year.

James de Uphaugh – Edinburgh Investment Trust



Year to date -28%

– Portfolio of chronic illness treatments

– Robust growth track record

– History of forecast upgrades

Global specialist veterinary pharmaceuticals company Dechra Pharmaceuticals (DPH) develops, manufactures and markets high quality products aimed at improving animal health and welfare. The shares have dropped around 40% since the highs in August 2021 which looks overdone and provides a buying opportunity for investors to get onboard a higher quality growth company. The fall has been driven by fears that the lockdown-induced pet boom is normalising. 

The general weakness in high quality growth shares in response to rising interest rates has also been a contributing factor. Investment bank Jefferies reckons Dechra is likely to be resilient from reversing Covid-19 trends. It notes that Dechra’s portfolio contains many products for treating chronic illnesses which affect older animals. These products are unlikely to have benefited from the pet boom. Management have indicated its markets are supported by strong fundamentals which are returning to more normalised ‘robust’ levels of historical growth. Finally, analyst’s earnings estimates have consistently been revised upwards over the last six months suggesting future positive earnings surprises. [MGam]



Year to date -39%

– Record low PE below 11

– Highly cash generative business model

– Flourishing digital operation

Investors should buy homewares retailer Dunelm (DNLM) despite a tougher consumer environment that has seen the 12-month forecast rolling price to earnings ratio de-rate to a grudging 10.8-times, according to Stockopedia. The cash-generative curtains, quilts and kitchenware seller is well-placed to navigate the cost of living squeeze while continuing to grow market share thanks to its broad product range, with low average item and basket values, as well as its focus on providing value at all price points. 

Dunelm, which continues to develop its flourishing digital business, is also managing to sustain its robust margins despite rising raw material, freight costs and the extra inventory costs required to mitigate against supply chain disruption. Having a well-stocked business is a competitive advantage and reflects Dunelm’s focus on ensuring good availability for customers. [JC]


HALMA £21.65

Year to date -31%

– Impressive returns on equity and capital employed

– 40-plus years of consistent dividend growth

– Excellent cash generation

The electronics engineer remains one of those stock market rarities – a company that never seems to put a foot wrong. Shareholders have benefitted from this reliability for years with total returns averaging 19.35% over the past decade, according to Morningstar data. That means for every £1,000 invested 10 years ago, an investor would now have £5,939. It has been another strong year of progress, with Halma’s (HLMA) pre-close update (23 Mar) suggesting full year to 31 March 2022 will be another record year for revenue and profitability. The company made 13 acquisitions during the year for a total of £166 million, continuing a vital ingredient of its growth strategy, and the company has hinted that its future M&A pipeline is extremely strong. Order intake was ahead of both sales and the previous year’s orders. Inflationary pressures, supply chain challenges and Covid issues, in China particularly, remain but the commentary from Halma suggests the business is managing these issues well, an impression shares by analysts at investment bank Berenberg following a visit to one of Halma’s subsidiaries in April. We believe Halma will continue to reward investors for years to come. [SF]


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