20 ‘quality’ stocks backed for tougher times
16th August 2022 13:18
by Graeme Evans from interactive investor
Stocks with earnings consistency and strong balance sheets are in demand as the global economy slows. A City bank has named its top European picks.
A list of top picks for investors seeking quality at a reasonable price (QARP) has highlighted Diageo (LSE:DGE), Legal & General (LSE:LGEN) and Auto Trader (LSE:AUTO) among 20 European names.
Analysts at investment bank Jefferies also recommend precision engineer IMI (LSE:IMI), OneSavings Bank (OSB Group (LSE:OSB) and Spirent Communications (LSE:SPT) due to their potential to withstand economic turbulence.
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The list comes as investors increasingly look for companies with earnings consistency as well as strong balance sheets and consistent cash flows, which have the potential to reduce the risk of dilutive fundraisings and even allow for opportunistic M&A.
A recent study by the bank confirmed that QARP stocks outperform in periods of slowing earnings and challenging macroeconomic backdrops.
The biggest name on the Europe-wide list is the luxury goods group LVMH (EURONEXT:MC), which Jefferies points out has grown market share in its key divisions by one-third in the last five years. It is also a strong cash generator and should end the 2022 financial year with minimal gearing.
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At drinks giant Diageo, the bank’s analysts believe that organic sales growth targets are defendable given the quality of the company’s portfolio, “sharp execution and embedded performance culture”.
Other London-listed stocks from the consumer-focused sector include Auto Trader, which Jefferies likes for its structural growth, net cash balance sheet and “very high” return on invested capital.
A favourable verdict on Greggs (LSE:GRG) focuses on its vertically integrated model, a strong position in a resilient sales category and its net cash. The bank adds that the chain has “a clear growth opportunity through store roll-out and delivery”.
A return to travel and accelerated industry consolidation means another food-on-the-go firm in the shape of SSP Group (LSE:SSPG) is on the list, supported by a strong balance sheet.
At InterContinental Hotels Group (LSE:IHG), the company’s asset-light and strong brand portfolio ticks the quality box for Jefferies alongside its record of strong free cash flow generation.
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Two of the three favoured quality stocks in the financial sector are London listed, with Legal & General liked for its competitive advantage in annuities and asset management and best in class return on equity and strong balance sheet.
Jefferies adds that specialist residential lender and retail savings business OSB offers a sector-leading cost/income ratio due to its efficient operating model. “Capital returns have only just begun”, it adds.
In the industrials sector, the bank likes IMI’s strong market positions, high divisional margin targets of above 20% and a robust balance sheet.
Jefferies also believes portfolio evolution at fellow precision engineering firm Spectris (LSE:SXS) has improved the mix of the business and notes that the balance sheet is net cash.
It adds that strong cash generation at Spirent Communications allows for sustained investment to ensure technology leadership and returns.
The other picks on the Europe-wide list are luxury goods group Kering (EURONEXT:KER), car giant BMW (XETRA:BMW), stock exchange business Deutsche Boerse (XETRA:DB1), steel manufacturer ArcelorMittal (EURONEXT:MT), energy company RWE (XETRA:RWE), Copenhagen-based biotech Novozymes, speciality chemicals firm IMCD (EURONEXT:IMCD), energy industry steel pipes supplier Tenaris (MTA:TEN) and flow control company Aalberts (EURONEXT:AALB).
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