Aviva (LSE: AV), GlaxoSmithKline (LSE: GSK), Standard Chartered (LSE: STAN) and NEXT (LSE: NXT) are top performers in 2015, and they may well sit in your diversified portfolio right now — but there are a few risks you ought to consider before deciding whether to remain invested or jump ship immediately.
Aviva: Management & Execution Risk
Aviva is in a sweet spot, but now that its acquisition of Friends Life has received approval from regulators, its performance will receive even more attention from analysts and investors who must be convinced from day one by flawless execution in deal-making.
The departure of Prudential‘s chief executive, Tidjane Thiam, who will join Credit Swiss later this year, is also one element that some investors could find disturbing. If you are invested in Aviva, you may well wonder if any of its key managers will be poached by other troubled banking giants.
Aviva management has room for error and, based on most metrics, the insurer’s valuation is not demanding, but its stock has rallied (+83%) in the last two years, and that certainly makes it less appealing than a few months ago.
Regulatory hurdles could also be a drag on performance.
GlaxoSmithKline: Management & Operational Risk
While virtually everybody expects its troubled respiratory portfolio to return to growth soon, Glaxo is still faced with challenging market conditions in the US.
Furthermore, it looks like its stock has risen (+18% year to date) in anticipation of extraordinary corporate activity, which may — or may not — lead to a partial spin-off of its HIV drugs business.
The unit could easily be valued at more than $20bn, and such action would be great news for shareholders.
“I am not sure management at GSK is brave enough to actually undertake such a massive deal,” a senior pharma analysts pointed out on Monday, however.
We’ll see how this one goes.
Standard Chartered: Financial & Restructuring Risk
The biggest risk for Standard Chartered shareholders is that the bank may have to issue more than $4bn of new equity to repair its balance sheet.
That’s a short-term risk that, however, could strengthen the bank’s balance sheet and render Standard Chartered a stronger financial institution.
Still, a rights issue would command a steep discount to its current valuation, which may knock confidence and increase pressure on the new management team.
The bank’s shares have rallied 10% in the last four weeks of trading based on expectations that new management will make a difference, and bullish reviews from analysts have also contributed to the surge.
This is a bank in the midst of a comprehensive restructuring, so I would be cautious to invest a large amount of cash in it. Keep an eye on quarterly results to see how the business moves on.
NEXT: Operational & Market Risk
On the one hand, guidance from NEXT highlights a tougher environment for multinational clothing, footwear and home products retailers.
On the other, NEXT is trying to manage expectations but results last week were just in line with forecasts, which was not good enough for such a stock market darling!
This retailer is a terrific value proposition — yet, if it doesn’t accelerate, shareholders may be faced with possible capital losses this year… the stock is up 7% this year, and only 8.3% in the last 12 months.
Based on most metrics, the shares are not incredibly expensive, but a strong operational performance is needed for its shares to rally from their current level.
Although this could be a good opportunity to add exposure for the long term, the risk is that NEXT will struggle to deliver a stronger performance on a comparable basis in 2015. Trailing figures were strong and won’t be easy to beat, while its guidance also suggests caution because sales and pre-tax profit may not grow as fast as in the past few quarters…
