The Motley Fool

What Should Neil Woodford Do With Allied Minds plc, Drax Group Plc & Rolls-Royce Holding plc Right Now?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

In a recent update on his fund’s performance, Neil Woodford showed where he has made and lost money in the 12 months to the end of June. 

Allied Minds (LSE: ALM) is one of the best performers in his portfolio, but Rolls-Royce (LSE: RR) and Drax (LSE: DRX) were a drag. 

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

Click here to claim your free copy now!

What’s next for these three companies is less obvious than it may seem at first sight. 

Why Allied Minds? 

Allied Minds had an average weight of 2.95% in Woodford’s portfolio — a percentage that is almost in the middle of the highest and the lowest exposure to any stock in his fund. It signals that if you invest in it, you’d do well to be careful with regard to the amount of stock you end up owning. 

Its performance contribution, at 3.21%, tops the ranking by some distance, which reflects a higher level of risk compared to that of several other holdings in Woodford’s portfolio. 

One obvious question now is whether the shares of Allied Minds have lost their sparkle?

Consider that its equity valuation is up 114% in the last year of trade, but its shares now change hands around their one-year median of 473p, for an implied forward valuation of 123 times based on the group’s market cap of £1bn divided by forward revenues of £8.3m — trailing revenues stood just below £8m. 

You’d expect a much higher growth rate for revenues or earnings or both to bet on its stock. 

After all, the biggest highlight of 2014 was its IPO, which was priced at 190p, for an implied market value of about £400m. It raised proceeds of $155m. Based on its funding needs, Allied Minds should be safe for a couple of years at least, in my view. 

No other key financial metric is available, though, and that’s because the company is at an early stage of maturity. A truly attractive feature is the sector where Allied Minds operates, given that it focuses on the commercialisation of scientific discoveries from universities and federal government institutions in the US.

While I’m really tempted to add its stock to my portfolio at this price, I need more evidence that the business can generate earnings and positive cash flows before committing to it for the long term. 

Rolls & Drax: What Do They Have In Common? 

The shares of both companies have fallen off a cliff in recent weeks, yet I think that Rolls-Royce offers more value than Drax at present time. 

Regulatory risk is a significant hurdle for Drax because the UK government is amending its green policy, withdrawing subsidies to the energy sector.

In Woodford’s portfolio, Drax had an average weight of 1.55% and recorded a performance contribution of -0.98% — it’s the worst performer ahead of GlaxoSmithKline (-0.91%), the second-largest holding in his portfolio, with an average weight of 6.49%. 

Drax’s valuation has not recoverd since its 30% drop on 8 July, when the group announced that the government had decided to “remove the Climate Change Levy (CCL) exemption for renewable electricity generated after 1 August 2015″, which prompted lower guidance for cash flows and earnings. 

The power producer has begun a strategic review of its operations, gauging its “long-term options” — in these situations, a takeover becomes the most likely outcome.

If you are tempted to bet on that, however, consider that its shares trade on forward earnings multiples north of 30x, and that Drax would cost up to £1.5bn or more, which isn’t exactly small change in this market, although it could draw the attention of infrastructure funds. 

In fairness, I’d rather bet on Rolls-Royce, which is not a bargain but whose shares trade on lower forward net earnings multiples in the mid-teens.

Rolls Rallies

With an average weight of 2.96% and a performance contribution of -0.57%, Rolls has been a rather disappointing investment for Woodford, but the tide may be turning.

Only a few weeks after a profit warning pushed down its stock close to its lowest level for almost four years, Rolls has rallied (+16% since 27 July) on the back of several rumours according to which activist investors could have a strategy to turn around the ailing engine maker. 

Rolls-Royce Holdings PLC on Monday said its top leaders met with ValueAct Capital Management after the activist investor raised its stake to more than 5% in the British aircraft-engine maker,” Dow Jones  reported on Monday.

That’s all we know, and it’s encouraging — but there are plenty of risks that could still sink the valuation of Rolls.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has recommended shares in GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.