Six speculative UK share tips for 2019

As equity markets end 2018 battered and bruised, Lee Wild brings us up to speed on last year's tips and his half-dozen higher-risk investments to own over the next 12 months.

With this bull market nearly a decade old, I've become used to writing in these articles about how well stocks have done over the previous 12 months. It had to end some time, though, and there was no escaping the gloom in 2018. 

For UK-focused investors, a peak for domestic indices in May was the highlight. While Brexit has had a predictably negative impact on sentiment, president Trump's trade war with the Chinese could have a serious impact on US profitability. During a period of rising US interest rates, higher inflation and withdrawal of monetary stimulus, events that impact on growth carry even greater risk.

This fed through to markets across 2018. The FTSE 100 is down 9%, the FTSE 250 10% and AIM All-Share 11.8% as at the start of December. Overseas, China has slumped by 22%, and both Hong Kong and Germany by 12%. 

Four of my six tips for 2018 are currently showing a loss, but there were opportunities to turn a handsome profit over the year. 

Of the speculative growth tips, own-brand supermarket product-maker McBride had risen 4% before diving 40% following a profits warning. Prudential's decision to demerge the UK business is seen as high-risk, which explains the switch from 9% gain to 15% loss. Electronics firm discoverIE was our star speculative growth stock. The shares surged 38% over six months to June, and are still up 5%.

Among the speculative income plays, Lloyds Banking Group reversed a 12% profit as UK interest failed to increase as expected and slower economic growth increases the risk of lower demand from borrowers. But the shares did generate attractive income. Galliford Try also delivered big dividend payments, but the shares fell 34%. On a brighter note, M&S rewarded shareholders handsomely both with dividend income and a small capital gain. An overhaul of the business is exciting.

Speculative Growth

AB Dynamics (ABDP)

Share price 1,450p; p/e ratio 29.5; dividend yield 0.3%

An Aim 10-bagger, AB Dynamics trades on 29 times earnings, dropping to under 24 times for 2020. Not cheap, but making equipment used to test and develop the cars of the future is high-margin work, and AB is tipped to deliver compound annual growth rate of 25% over three years. Spending heavily on extra capacity to drive growth comes at the expense of margin, but net cash was £16 million at year-end and the order book stretches deep into 2019.

Halma (HLMA)

Share price 1,411p; p/e ratio 25.9; dividend yield 1.2%

It's been a significant beneficiary of the equities bull run, rising eightfold since 2009, but Halma – now a FTSE 100 constituent – is a port in a storm and well-placed to navigate possible stockmarket turbulence in 2019. A global portfolio of companies supplying technology used in hazard detection, life protection, personal and public health improvement and protecting the environment spreads risk for investors, should economic growth slow suddenly. 

Fevertree (FEVR)

Share price 2,483p; p/e ratio 42.7; dividend yield 0.6%

Fevertree Drinks premium drinks mixers generated £104 million of first-half revenue, up 45%, and a 36% increase in pre-tax profit to £32.6 million. The company regularly exceeds expectations, and said in July it would do so again this year. Despite skipping the usual update in November, industry data implies full-year UK growth could be 35-45%, double some estimates. The shares aren't cheap despite their recent slump, and they are volatile, but further progress here and promise of overseas growth make Fevertree a speculative buy. 

Speculative Income

British American Tobacco (BATS)

Share price 2,783p; p/e ratio 8.8; dividend yield 7.6%

British American Tobacco has been replacing lost revenue in its old core market with vaping products and more enthusiastic customers in emerging markets. This isn't one for ethical investors, but the latest share price crash following a possible ban on menthol cigarettes in the US does offer a great opportunity for both income and capital appreciation. Concerns around BAT's debt look overplayed, a p/e of less than 9 looks too cheap, and the yield prices in plenty of bad news.
Morses Club (MCL)

Share price 135p; p/e ratio 8.8; dividend yield 6.5%

Morses Club is the UK's second-largest doorstep lender. It's been listed on AIM since 2016, but involved in the industry for over 20 years. Extra financial backing just received gives Morses the firepower for acquisitions as the sector consolidates. New Open Banking regulation to create more competition and innovation should play into Morses' hands. The yield is covered 1.7 times by earnings, and a single-digit p/e is undemanding for this steady performer. 

Vodafone (VOD)

Share price 168p; p/e ratio 16.2; dividend yield 7.9%

Competition is fierce, especially in Spain and Italy, and Vodafone shares had lost a third of their value since May. Concerns about spending on 5G spectrum and borrowing for mega-acquisitions like Liberty Global have also raised concerns about the dividend. However, a further €1.2 billion in cost cuts over the next three years and improving momentum outside of trouble spots should secure the generous payout in 2019.