UK share tips for adventurous investors in 2018

Our 2017 income and growth tips for more adventurous investors delivered good results. Lee Wild reveals a new selection for 2018.

Investors would typically be happy with share prices at a record high and positive returns from domestic stock markets. 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 per cent. Brexit remains a cap on investment and economic growth, and sterling is up 9 per cent 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 per cent 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 per cent following a knockout fi rst-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 are down 18 per cent, but they are recovering following better results.

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

Speculative Growth

Prudential (PRU) - Share price 1,827p; p/e ratio 12.1; dividend yield 2.8 per cent

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 per cent 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; p/e ratio 12.4; dividend yield 2.6 per cent

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 per cent and the firm could well beat its target of 7.5 per cent . McBride shares are at a big discount, compared with those of its peers, and are cheap given forecasts for 15 per cent annual profit growth up to 2020.

DiscoverIE (DCSV) - Share price 331p; p/e ratio 13.9; dividend yield 3 per cent

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 per cent in the first half, on organic sales up 9 per cent; the firm has a record order book; and growth is underpinned by new project design wins. Look for a 20 per cent increase in 2018 profit and double-digit growth thereafter. A big valuation discount, compared with peers, should narrow.

-Seven New Year resolutions for investors

Speculative Income

Lloyds Banking Group (LLOY) - Share price 65.1p; p/e ratio 9.0; dividend yield 6.7 per cent

There seems little doubt that Lloyds will continue to grow its dividend, although the scale of the 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 expected to return a third of its market cap to shareholders over the next four years.

M&S (MKS) - Share price 308p; p/e ratio 11.2; dividend yield 6 per cent

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 costs. The shares are cheap, and strong cash inflows should off set any pressure on the generous dividend.

Galliford Try (GFRD) - Share price 1,184p; p/e ratio 6.3; dividend yield 8.5 per cent

Most housebuilder shares soared by at least 30 per cent 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 per cent 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 per cent, 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. 

Keep up to date with all the latest financial news and investment tips by signing up to our newsletter. Email subscribers will also receive a free print copy of Money Observer magazine.