Here are June's top tips from the Motley Fool's writers.
Another month, same old eurozone crisis. Despite the lack of any solution, the stock market still seems remarkably sanguine about the whole affair.
Of course, we've been busy highlighting our favourite investment ideas throughout the turmoil. In a slight format change for our usual end-of-month round-up, in my role as an analyst for our Motley Fool Share Advisor investment service I've picked five popular shares our Foolish writers have highlighted recently, and I'm going to provide some thoughts on each of them.
Next (LSE: NXT) shares are currently setting all-time highs. Despite this, Next is trading at a forward price-to-earnings (P/E) ratio of just under 12 -- neither dramatically overpriced nor an obvious bargain in my view -- but the company's strong performance in these bleak times for retailers may argue for paying up for quality.
Driven by the company's online sales, which grew almost 12% in the first half of the year, Next is taking full advantage of the revolution in retailing to drive asset-light, higher-margin sales (it is cheaper to sell out of a warehouse than on a high street). This provides healthy cash flow. I'd prefer management use this cash to bolster the 2.8% dividend yield -- though I really shouldn't complain about the 15% increase in this year's payout -- instead of buying back £200 million worth of shares at the current price.
Next doesn't exactly fall into the value investor's bargain bucket, but it appears to be a high-quality company and I have to agree with David O'Hara's analysis here -- it could nicely complement an investor's portfolio.
Domino's (LSE: DOM) has an asset-light franchise model, which kicks off shedloads of cash. Jane Coffey, a recent guest on our Money Talk podcast, is definitely a fan.
Management has been using this cash to grow the dividend and buy back its shares. However, with 726 stores in the UK and Ireland, total sales growth slowing to 9% and like-for-like sales (sales from stores open more than two years) slipping dramatically to 3.0% last year, the rating of 24 times next year's earnings may deter many prospective investors.
If this were the complete story I'd have to agree, but Domino's is just starting to launch its franchises in Germany -- one of the few European markets that it could be argued needs to see more consumer spending. Given the size of the German market, Domino's could feasibly double its business, if it succeeds. Pizza travels well, but success is never guaranteed, and while these shares aren't as expensive as they might first appear, there is plenty of risk in buying them at this price.
As a rule, I tend to steer clear of small oil plays -- it just isn't my area of expertise. The risky venture of exploring for oil is multiplied when the company in question's fate is tied to a few small plots in politically unpredictable markets.
Despite my aversion to this realm, SOCO International (LSE: SIA) is intriguing because it has actual producing assets -- and those assets look like they are about to produce a whole lot more, as Tony Luckett revealed -- but the company still being priced for a lot of uncertainty.
The fact that the company hasn't been able to find a buyer for its Vietnamese operations yet is a potential cause for concern. If major players in the field -- including some state-funded Chinese companies that would love to make their presence felt in the South China Sea -- haven't been compelled to snatch up a piece of the action, why should I? These shares appear to have the potential for solid returns, but the company is too far outside my circle of competence for me to feel comfortable with them right now.
Carillion's (LSE: CLLN) low-margin business isn't all that attractive to me, but I do like the moves management has been making recently. Moving away from the highly competitive and budget-pressured construction industry and more into services should help remove some cyclicality. The recent acquisition of Eaga provides some much-needed higher margins.
While the Eaga acquisition pushed the company into a net debt position for the first time in three years, the five-year maturity of the bulk of the debt, and the company's solid cash flow, mean the hefty dividend shouldn't be threatened in the near term. As Kevin Godbold points out, the P/E of under 9 is undemanding, and the 6.2% dividend yield is quite attractive in this market, so income-focused investors might want to have a closer look.
David O'Hara is right to say Tesco (LSE: TSCO) is one of the most debated shares on the market. Sure, the stores draw harsh criticism compared to Sainsbury (LSE: SBRY) and Morrison (LSE: MRW), while the US venture, Fresh & Easy, has so far proven to be an expensive experiment. But I think investors have lost the forest for the trees and are (small-f) foolish for expecting results to manifest immediately.
Despite the nay-saying, the pretenders have yet to erode Tesco's 30% market share in the UK, and its Asian operations provide access to markets with much better growth prospects.
The cash flow generated by Tesco's operations, and strategic selling from its £37bn-strong property portfolio, covers its 4.7% dividend yield 1.5 times over. What's more, the reduced capital expenditure in coming years should further bolster this buffer. You don't turn around a ship as large as Tesco overnight, and I think the shares are a bargain for patient investors. Out of all these five shares, I'd rank this as my favourite right now.
Of course, free tips are all very well. But most investors want ongoing coverage of the shares they hold. They want to know when to buy more and when to sell out, as well as keeping up with major events that might impact upon the share price.
That's why we created Motley Fool Share Advisor. We provide an in-depth analysis of the two new recommendations we make each month, and then we track their performance via our online scorecard where each share is given a Buy, Hold or Sell rating. Members get regular updates on all of our recommendations, plus access to our exclusive member-only website. We've highlighted 10 shares since we launched in February, and the last two were published just this week.
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> Nate and The Motley Fool own shares of Tesco.