Six speculative UK share ideas for 2021

Our head of equity strategy names three exciting growth stocks and three high-yield shares he's backing.

A strong 12 months for stock markets generated optimism heading into 2020, and a Santa rally spilled over into the new year. But we are all familiar with the story by now, and this cruel pandemic has caused social, political and economic mayhem since last March.

However, after the stock market collapse in February and March, and as investors anticipated the economic impact of the virus, buyers returned in droves. Most global markets managed a recovery up to the summer, and some, like the US technology index Nasdaq, have made record highs since.

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Our own indices – the FTSE 100, FTSE 250 and AIM All-Share – enjoyed mixed fortunes. Although off their worst levels, struggling blue-chips ended 2020 down 14.3% and the mid-cap index fell 6.4%. But small cap shares were the place to be, and the growth-oriented AIM market soared 20.7%. 

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Tip performance in 2020

My best speculative growth stock tips for 2020 demonstrated perfectly some new emerging investment themes, and the trio generated an average return of 55%. 

Video games developer Team17 (LSE:TM17) surged from 316p to 792p for a gain of 151%. In a fast-growing industry, and with bullish forecasts and iconic titles, I thought the business would do well, but I couldn’t have anticipated the boost to video gaming from home-working and furloughed staff. 

Gamma Communications (LSE:GAMA) also beat the market, up 30% for the year. Again, demand for products that let people work remotely hit Gamma’s sweet spot, and results were impressive. There was less for promotional products direct marketer 4imprint (LSE:FOUR) to cheer, as weekly orders plunged to just a fraction of what they were the year before. That was reflected in a 17% decline in share price.

While many tech growth stocks thrived, 2020 was the worst of all years for picking speculative income stocks. Getting exposure to high yield carries risk at the best of times, but that risk multiplies when companies must save cash to survive.  

Centrica’s (LSE:CNA) anticipated yield of 6.4% was wiped out completely and the shares fell 41%. UK royalty finance firm Duke Royalty (LSE:DUKE) switched to scrip dividends for a time (dividends paid in shares, not cash). Include these and the annual yield was 4.8%, although the share price dropped 36%. There was one bright light in Direct Line Insurance (LSE:DLG). Shares in the insurer rose 7% and they also yielded 7.3% thanks to an interim dividend and payment of the final dividend for 2019 which had previously been cancelled.

Prices for UK shares, especially, have risen sharply in the first few weeks of the new year, but there are still plenty of companies worth owning in 2021. 

Speculative growth

Gamesys (LSE:GYS)

Share price 1,304p; PE ratio 10.0; dividend yield 2.8% 

Online gambling has experienced a boom in popularity, especially since last year’s Covid lockdowns, and Gamesys has been a beneficiary. It owns Jackpotjoy and a host of other online bingo and casino sites. Trading has been better than expected, with core UK and Japanese markets doing well, and watch out for further expansion in the US this year. A single-digits PE ratio and yield of around 3% make Gamesys interesting.

Ideagen (LSE:IDEA)

Share price 268p; PE ratio 44.3; dividend yield 0.1% 

Ideagen supplies regulatory and compliance solutions to companies within highly regulated industries. That means audit, risk and compliance software for financial services and banking, and safety and quality management software for airlines, food companies and the oil industry. It has an impressive track record of acquisitions and has already spent over half the £49 million it raised recently. Expect more action this year, which should be reflected in an improved share price.  

Scapa (LSE:SCPA)

Share price 184p; PE ratio 37.5; dividend yield 0.0% 

Supplying tapes and adhesives to the medical industry has been lucrative for Scapa, but the postponement of elective surgeries during the pandemic has hurt. Orders from the automotive and construction industries are down, too, and it still bears the scars of a lost contract in 2019. However, business is recovering fast, and the current price/earnings valuation drops to just 14.3 next year, a significant discount to its long-term average. That gap should narrow on evidence of further recovery. 

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Speculative income

Diversified Gas & Oil (LSE:DGOC)

Share price 112p; PE ratio 8.1; dividend yield 9.5% 

This canny operator offers one of the most attractive dividend yields around. Focusing more on production than exploration, Diversified Gas & Oil drives margins which produce cashflow that is used to pay the generous dividends. Its low-cost model means the company can operate effectively even when commodity prices are low. And despite what is a difficult period for the sector, Diversified still raised the shareholder payout by 7%. The CEO told me the dividend and the payout ratio is “non-negotiable”. 

AEW UK REIT (LSE:AEWU)

Share price 79.2p; PE ratio 10.7; dividend yield 10.0% 

Commercial property was out of favour even before the pandemic, but AEW UK REIT is demonstrating why it warrants inclusion in this year’s income picks. The trust, run by highly experienced real-estate managers, directly owns a diversified portfolio of regional UK commercial property assets. Its net asset value has held up well through the crisis and rent collection speed continues to improve. AEW has kept paying a 2p dividend each quarter and is on track to return 8p for the full year.  

M&G (LSE:MNG)

Share price 199p; PE ratio 8.8; dividend yield 8.9% 

A stock boasting one of the cheapest valuations in its sector and one of the highest yields warrants further investigation. In the case of insurer and asset manager M&G, a sky-high yield implies an expectation of a dividend cut at some point, perhaps by 30%. However, M&G can afford the current payout and, even if it did re-base the dividend by that much, the shares would still yield 6.3%. We’ll find out at the annual results in early March. 

Note: Performance data SharePad, as at 15 January 2020.