With the third quarter of 2015 being the worst three-month period for global stockmarkets in four years, investors will hope the first day of October rings in a more profitable fourth. Just to make sure, one broker has been tinkering with its portfolio, bringing in some interesting growth plays and ditching one of Britain’s best-known blue chips.
Despite outperforming the market by 9.2% in the quarter to September, Panmure Gordon admits that the performance of its ‘Conviction List’ portfolio is “hardly a great result” against a market that fell 9.1%. As investors processed the impact of the slowing Chinese economy, the MSCI Global Index fell 11.2% in the period. Analyst Jeremy Grime also points to “a couple of true mistakes” in the commodities sector.
However, it wasn’t all doom and gloom, with some relief found in the Federal Reserve leaving interest rates unchanged – Panmure expects a December hike – and solid growth in the UK, US and Eurozone setting the world economy up for nearly 3% growth this year. And although the portfolio didn’t break any trends in the last quarter, it has outperformed the Datastream UK market index by 114% since 2010, with a capital return of 147%.
With potential upside of nearly 20%, it’s little wonder the analysts have added Berkshire-based software technology company Micro Focus (MCRO) to their fourth quarter Conviction List at 1,200p. Panmure reckons the group, which is a member of Interactive Investor’s Summer Portfolio, could be worth 1,438p if it implements greater divisional transparency and its Amsterdam conference in October goes well.
In 2014, total revenue nearly doubled to $834.5 million at constant currency, and, although adjusted cash profit beat expectations with an 86% leap to $357.6 million, pre-tax profit fell 38% to $91.4 million due to the purchase of US software rival The Attachmate Group. “The current ratings are a c33% discount to the sector, and do not give the company any credit for its continued strong operational performance, nor cash returns – we expect those next year,” says Panmure. Buy.
Explorer with 60% upside
Joining Micro Focus in the portfolio is pub chain Greene King (GNK) and Tanzania-based oil and gas explorerWentworth Resources (WRL). With a target price of 50p, the analysts reckon Wentworth has over 60% upside. Valuing Greene King at 1,015p, the pub chain’s shares could be worth an extra 30%.
Panmure’s portfolio doesn’t just contain long positions. Betting on the likelihood that the following shares could plummet, it has added engineer Rolls-Royce (RR.) and booze chain Majestic Wine (MJW) to its short holdings. At 651p, Panmure reckons Rolls is worth 16% less at 520p, while the wine merchant is overvalued by about 14%.
Just four days into his tenure as boss of Rolls, Warren East issued his first profits warning at the iconic engineer. We warned recently that things could be about to get a lot worse as trading conditions continue to deteriorate and commodities continue to suffer, especially after the further sharp depreciation of emerging market currencies. Clearly, Panmure has the same thinking.
The broker ejects more companies than it lets in this quarter, with the low oil price blamed for two exits –Anglo American (AAL) and Faroe Petroleum (FPM). With global turmoil and cheap oil wiping the shares out, Anglo has crashed by 39% and Faroe by a quarter. “We got it wrong,” confesses the analyst.
Also leaving its long-holding portfolio are travel agent Thomas Cook (TCG), hi-fi manufacturer Focusrite (TUNE) and recruiter Robert Walters (RWA), all of which are “stale”. After Thomas Cook failed to deliver the upgrades investors were pining for, a sell-off leaves the stock trading 15% lower in the three months to June 2015. With no earnings upgrades, Focusrite’s shares have drifted down 6% and Robert Walters has struggled against a declining market and the shares are flat.
With 17 stocks now in its portfolio, Panmure has long positions on Allergy Therapeutics (AGY) (Buy, TP 47p),Chemring (CHG) (Buy, TP 294p), GLI Finance (GLIF) (Buy, TP 71p), Greene King (GNK) (Buy, TP 1,015p),Hammerson (HMSO) (Buy, TP 825p), Hansard Global (HSD) (Buy, TP 120p), Imperial Tobacco (IMT) (Buy, TP 3,730p), Informa (INF) (Buy, TP 650p), Micro Focus (Buy, TP 1,438p), RPC Group (RPC) (Buy, TP 828p),Ryanair (RYA) (Buy, TP€16.5), Shaftesbury (SHB) (Buy, TP 1,106p) and Wentworth Resources (Buy, TP 48p), with short positions on Majestic Wine (Sell, TP 320p) and Rolls-Royce (Sell, TP 520p).
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.