Six share tips for 2018

Investors would typically be happy with share prices at a record high and positive returns from domestic stockmarkets. However, the UK's single-digit gains in 2017 were dwarfed by stellar returns in the US and the performance of alternative assets such as bitcoin, up over 1,000%.

Brexit remains a cap on investment and economic growth, and sterling is up 9% versus the dollar, but there's not much wrong with UK equities. Yes, they're not cheap, but profits are growing and talk of overvaluation is a distraction.

So how did our 2017 speculative tips fare?

Software systems firm Scisys was our top-performing growth tip of 2017, having returned 42% by mid-November.

Markets liked the firm's strong results, big contract wins and €18 million (£13 million) of work on the German national satellite communications mission in October.

Within a month of tipping Mysale, the online shopping club's share price had risen by 38% following a knockout first-half update. That was a highlight, but there's still lots to like about the business.

Global trends in technology were meant to drive growth at Software Quality Services, but results in March told a different story, amid a shift to shorter-term digital projects. The shares fell 18%, but, just as results began to improve, the company accepted an all-cash bid from German firm Assystem Technologies, valuing SQS at 825p. That’s 36% higher than our tip price this time last year!

Our trio of speculative income stocks did what we picked them to do. Legal & General yielded 6.1% and returned a 12% capital gain. Galliford Try and Greene King yielded 7.4% and 5% respectively, but their share prices fell.

Speculative Growth

Prudential (PRU)

Share price 1,827p; PE ratio 12.1; dividend yield 2.8%

Prudential has outpaced its UK rivals over the past decade, while the head of its Asia division says it can double profits in the region over the next five to seven years.

Chiefs in the UK and US also talk loudly about growth opportunities. Prudential is tipped to improve earnings at a 9% compound annual growth rate over the next five years and push up the annual dividend at the same rate. This is growth at a good price, given that the Asia division alone is valued at £14 a share and the whole business trades on just 12 times 2018 earnings.

McBride (MCB)

Share price 226p; PE ratio 12.4; dividend yield 2.6%

Making own-brand products for supermarkets is challenging in an industry where margins are paper thin, but McBride's three-phase strategy, "repair, prepare, grow", has enjoyed success. Phase one is done, two is on track and the growth plans are finalised.

Its adjusted operating profit margin has improved to 5.9% and the firm could well beat its target of 7.5%.

Doubling revenue from making customer branded products will make it easier. At a big discount to peers, McBride shares are cheap given forecasts for 15% annual profit growth out to 2020.

DiscoverIE (DSCV)

Shareprice 331p; PE ratio 13.9; dividend yield 3%

Higher margins and a shift in focus to design and manufacturing inspired Acal to change its name to DiscoverIE Group – discover innovative electronics.

But it's not a funky new name that will decide the electronics distributor's fate. Adjusted earnings grew by 24% in the first half, on organic sales up 9%; the firm has a record order book; and growth is underpinned by new project design wins.

Look for a 20% increase in 2018 profit and double-digit growth thereafter. A big valuation discount, compared with peers, should narrow.

Speculative Income

Lloyds Banking Group (LLOY)

Share price 65.1p; PE ratio 9.0; dividend yield 6.7%

There seems little doubt that Lloyds will continue to grow its dividend, although the scale of scepticism about the bank and the size of its potential payout make the lender a speculative income stock.

It shouldn't be, however, considering that it has fixed its balance sheet and is in better shape than most of its rivals. Impressive profit growth over the past few years has bankrolled significant shareholder returns since the bank resumed payouts in 2015. 

With its sector-leading dividend, Lloyds can be expecting to return a third of its market cap to shareholders over the next four years.

M&S(MKS)

Share price 308p; PE ratio 11.2; dividend yield 6%

Turnarounds and the executives hired to deliver them come and go with alarming regularity at M&S.

None have had any lasting success and the City is dismissive of the retailer's chances of turning its business around, so M&S is a true contrarian play.

However, new chairman Archie Norman has a great track record, and he has backed himself with hefty share purchases.

A new five-year plan will grow volumes and simplify the business to reduce those of its peers, and are cheap given forecosts. The shares are cheap, and strong cash inflows should offset any pressure on the generous dividend.

Galliford Try (GFRD)

Share price 1,184p; PE ratio 6.3; dividend yield 8.5%

Most housebuilder shares soared by at least 30% in 2017. Unfortunately, our pick, Galliford Try, didn't, largely because of cost overruns.

But its problems appear to be over, so ditching Galliford now, after a 9% drop in its share price in 2017, would be a mistake.

Galliford currently offers a well-covered sector-leading forward yield of more than 8%, and it is the cheapest housebuilder around. It is closing the gap to its rivals, and its chairman has just bought £75,000 of shares in the company.

ii publishes information and ideas which are of interest to investors. Any recommendation made in this article is based on the views of the writer, which do not take into account your circumstances. This is not a personal recommendation. If you are in any doubt as to the action you should take, please consult an authorised investment adviser. ii do not, under any circumstances, accept liability for losses suffered by readers as a result of their investment decisions.

Disclosure

We use a combination of fundamental and technical analysis in forming our view as to the valuation and prospects of an investment. Where relevant we have set out those particular matters we think are important in the above article, but further detail can be found here.

Please note that our article on this investment should not be considered to be a regular publication.

Details of all recommendations issued by ii during the previous 12-month period can be found here.

ii adheres to a strict code of conduct. Members of ii staff may hold shares in companies included in these portfolios, which could create a conflict of interests. Any member of staff intending to write about any financial instruments in which they have an interest are required to disclose such interest to ii and in the article itself. We will at all times consider whether such interest impairs the objectivity of the recommendation.

In addition, staff involved in the production of investment articles are subject to a personal account dealing restriction, which prevents them from placing a transaction in the specified instrument(s) for a period before and for five working days after such publication. This is to avoid personal interests conflicting with the interests of the recipients of those investment articles.