Shares for 2018

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If you jumped on our Shares for 2017 last January, you would have had a pretty good year, investment-wise.  Depending on your currency, timing and weighting, you’d have beaten the market by double-digits and maybe doubled it.  Unless of course, you paid for the shares in Bitcoin, in which case, you’re probably acting like Michael Douglas in one of his other movies, Falling Down.

I’d love to take credit for the performance of the shares on last year’s list, but the S&P500 went up 20% on its own, and it has to include the worst 450 stocks along with the 50 best.  It’s unlikely you’ll get too many years like 2017 in an investment lifetime without a crash preceding it.

That would be my first bit of advice for 2018: significantly lower your return expectations, and don’t base them on 2017.  Companies that were trading at a PE ration of 10-15 a year ago are now trading at 20-25.  You’ll need to navigate a bit more in 2018.

I’m going to do this piece in two sections – first, some things to look out for generally in the coming year, and second, the share listing and some comments on the specific companies.

But first, some notes around the half-assery of my list:

  • They’re companies that have some growth in them on the upside, but largely have some safety on the downside through net cash or consistently strong market position or profit.
  • I like companies with net cash for a number of reasons.  An excess of cash in a profitable company usually results in rising dividends, share buybacks, and sometimes with smaller capitalisation companies, takeover bids.   Cash alone isn’t enough though.
  • I have no interest in a company that isn’t already profitable, and almost no interest in a company without profit growth.
  • I’m not really looking for turnaround situations that aren’t already turned around.  Company management is notoriously unreliable and/or self-interested.
  • For UK shares, I’m less keen on the large companies than the smaller £50-200 million market cap companies.  They tend to upgrade better.
  • I also favour the global “greats”: US based companies that dominate their industry/field.
  • As always, the biggest swing up or down on each of them will probably be dictated by the market as a whole.

OUTLOOK FOR 2018

  • You’ll hear some TV-paid idiots trying to tell you that “all the signs are pointing to a market crash”.  They said the same a year ago.  Those are the guys that correctly picked 13 of the last 2 recessions.  You can argue that PE ratios are at the high end, and prices may stagnate or drop some percentage, but you don’t, as it stands today, have to fear a crash for non-terrorism or cyber-failure reasons, in which cases, you likely will have bigger problems.  Money is still cheap, and there aren’t liquidity issues.
  • The two biggest factors that led to the market rises in 2017 were the continuation of low global interest rates and Trump’s corporation tax reform.  A change to either of those is the only market-wide thing you should be wary of – interest rates most likely.
  • Holding cash isn’t doing you any favours.  Don’t try to time the market at the top end and sell off – but use any sizeable drops to buy more of what you like.
  • As with all years, you’re going to get opportunities through the year to buy good stocks at a discounted price – some analyst wakes up with a theme and downgrades them, their results are misinterpreted, some regulation that affects 5% of the business is floated, North Korea blows up another one of its own cities.  Take advantage when you can.
  • Thanks to Trump, the USA is entering a new Golden Age.  Unemployment is down, the market is up, regulation is getting removed, and the tax reform measures make a massive difference to US-based profits, and to the ability to use non-US cash.  Expect more M&A activity.
  • The corollary to that is increased GDP leads to increased inflation, which ultimately leads to increased interest rates to slow the whole thing down.  It should only be marginal this year.
  • “Despite Brexit” might move the market downwards at times, but its not going to actually affect the UK economy.  If the government stops being wet lettuces about it, it could be great for the UK economy.

THE LIST

(prices as of January 3rd)

TICKER COUNTRY PEG Ratio FWD EPS GROWTH FWD PE RATIO DIV YIELD NET CASH (DEBT) PRICE
888 UK 1.0 14% 17.8 4.5% 18% 280
AAPL US 0.6 24% 15.0 1.4% 19% 172
ABDP UK 0.4 62% 32.1 0.3% 6% 1058
AMO UK 1.5 8% 13.7 3.4% 11% 197
AMZN US 1.6 86% 150.5 0.0% 1% 1189
BRK.A US 3.3 5% 19.2 0.0% 19% 295000
BDEV UK 1.8 6% 10.1 6.6% 15% 654
BQE UK 2.6 10% 28.2 0.0% 17% 274
COG UK 0.3 107% 34.6 0.0% 12% 159
CROS UK 0.3 51% 15.0 0.0% 58% 66
DC UK -0.3 -22% 7.7 5.5% -10% 203
DIS US 1.7 10% 18.1 1.4% -18% 112
ETO UK 0.9 15% 13.0 0.4% -31% 323
FB US 2.0 13% 27.4 0.0% 7% 181
GOOG US 0.9 28% 26.0 0.0% 13% 1073
IGG UK 2.3 6% 15.7 4.4% 6% 769
IPX UK 1.1 18% 22.1 1.7% 8% 170
JD UK 1.3 11% 13.9 0.5% 7% 345
MGR UK 1.8 7% 12.7 2.9% 25% 38
MSFT US 1.0 24% 25.4 1.7% 12% 86
NKE US 1.6 14% 24.2 1.3% 11% 63
PYPL US 1.3 20% 33.6 0.0% 9% 74
REC UK 2.2 6% 12.2 6.1% 42% 44
RWA UK 1.2 12% 16.2 1.7% 3% 580
TW UK 1.1 8% 9.8 6.6% 10% 208
V US 1.5 17% 28.5 0.6% 4% 114

Here’s some comments on the shares on the list:

  • As you look at the list above, everything is on there because of a high forward earnings expectation, a high amount of net cash, a low PE ratio, or their market position.  No individual share on that list right now is a no-brainer.
  • I’ve commented plenty on Apple, Facebook, Google, Microsoft and Amazon.  They’re the dominant players in the fields, have huge amounts of net cash, consistently grow underlying profits and are in prevalent, growing industries.  None of their shares are cheap, but they don’t deserve to be: they are great businesses to own a part of.
  • Apple’s going to sell phones with less frequency – the quality is better and they’re lasting longer, plus the Samsung’s are not much worse.  But their Services revenue (iTunes, App Store) alone is more than Facebook’s entire revenue.
  • Nike is the number one fashion company in the world – if you think 63 is too expensive, it usually gets downgraded twice a year by $10 a share, so look out for those.
  • Visa is a magnificent leech on the economy.  It takes a percentage fee from a huge number of transactions every day – and as the value of transactions and the number of them increase, they gain with it.  Mastercard (not listed, but just as good) and PayPal are similar.  As time goes on, cryptocurrencies might take a bit of their market share, but we’re nowhere near there yet.
  • Entertainment One (ETO) gets a spot because of an expected continuation of media consolidation – with Disney launching streaming products this year and next, and Netflix, Hulu and Amazon already in that space, any holders of content are potential takeover targets (ETO owns Peppa Pig, which kids apparently go batshit for, and movie properties).
  • Dixons Carphone (DC) dropped half its market cap in six months last year, and is still about 70% off its highs.  The reason was a dropoff in phone contracts as people kept their phones longer.  But they’re the dominant UK electronics retailer, in a country where everyone has multiple electronics on them.  a PE of less than 8 is too cheap, and they’ll probably beat earnings expectations.
  • IG Group is the former financial spread-betting company that has since branched out to offer share accounts, CFDs and ISAs.  Their share price dropped from 950 to 450 a little over a year ago over threats of spread-betting regulations.  They also take a dive any time anyone mentions MiFiD.  They’re a great business that will be minimally affected by either set of regulations (and they’ll probably beat earnings expectations).  They also have very good non-UK earnings that are growing.  And all the spread betting companies are getting a boon from people racing to sign up and deal Bitcoin and its brethren.
  • Berkshire Hathaway owns a huge volume of profitable US businesses that will benefit from the corporate tax cuts.
  • Disney is worth keeping an eye on as a) the Fox merger moves forward, and b) they announce detail on their streaming platforms due to go to market in 2018 & 2019.
  • 888 is a great, cash generative, online gambling business.  And the industry in the UK has been consolidating for years, and they’re the last sizeable standalone.
  • I’ve listed two UK property companies (TW and BDEV), mainly because they have the best combination of net cash, land banks and PE ratio.  You might prefer others.  They both dip through a year at different times by 10-15% for all sort of “despite Brexit” reasons.  Pick them up on the cheap spots – they also have outrageous dividends.

There you go – good luck.  Maybe don’t sell your Bitcoin to buy them again this year though.

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Disclaimer: this isn’t investment advice. This is a blog, and most of what I write on this site is pure garbage. Definitely do your own research and don’t rely on my half-assed analysis. I am biased because I have owned shares in a number of these companies over time. I am not remotely qualified to give investment advice.

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