They say that elephants can’t gallop. It’s generally true of the super-heavyweights at the top of the FTSE 100, but further down the blue-chip index there are always some stocks to be found that are fleet of foot.
The Footsie’s big winners so far this year are housebuilder Taylor Wimpey (LSE: TW), insurance group Direct Line (LSE: DLG) and financial services firm Hargreaves Lansdown (LSE: HL).
As of Tuesday’s market close, Taylor Wimpey has gained 34% year to date, Direct Line is up 39% and Hargreaves Lansdown has soared by 48%. Can these three winners deliver again for investors in 2016?
Taylor Wimpey
The rise of Taylor Wimpey’s shares this year is just the latest leg up in what has been a long and strong recovery since the depth of the financial crisis. The rising share price has been supported by an improving economy and Taylor Wimpey’s explosive earnings growth. Annual earnings growth for the last three years reads 119%, 46% and 67%.
In a trading update released on Monday chief executive Pete Redfern commented:
“We have seen an excellent summer selling season strengthen further in the autumn period, with customer confidence high and demand underpinned by rising real wages and good access to a wide range of mortgage products”.
Analysts are expecting a 32% rise in earnings this year, which makes Taylor Wimpey’s price-to-earnings (P/E) ratio of 12.5 and dividend yield of 5% — at a share price of 185p — appear remarkably generous.
Of course, the boom times for housebuilders won’t last forever, but if Taylor Wimpey is right that “consumers have resilience to future interest rate movements”, we could see further strong earnings growth — if not quite at the breakneck pace of recent years — and further gains for the shares in 2016.
Direct Line
Direct Line is another stock that looks generously priced, despite the strong rise in its shares this year. At 404p, the insurance group trades on a current-year forecast P/E of 12.4, with analysts expecting 27% earnings growth. Furthermore, the dividend yield is a whopping 12.6%.
However, this year’s numbers aren’t a good guide to the future, because Direct Line has now disposed of its international operations. A special dividend paid from the proceeds of the sale accounts for a big part of the current yield, and both the dividend and earnings will fall back next year.
Direct Line doesn’t look so attractive on consensus forecasts for 2016, although a P/E of 14.4 and a dividend yield of 5% aren’t entirely unappealing. The company’s efficiency drive, and other initiatives, are progressing well, according to a recent trading update. As such, I can see scope for further gains in the share price in 2016, although the magnitude would appear unlikely to match that of this year.
Hargreaves Lansdown
Hargreaves Lansdown (HL) is the UK’s no. 1 ‘investment supermarket’ for private investors. As you might expect, HL has benefitted from improving investor sentiment and the recovery of equity markets since the financial crisis.
The company released a first-quarter trading update last month (for its financial year ending 30 June 2016), reporting record net new business and net new active client numbers for the first quarter of any financial year. HL now looks after £54.7bn for its 760,000 clients.
It should be no surprise that HL, as a company with a dominant position in its industry, trades on a higher rating than Taylor Wimpey and Direct Line, which operate in more competitive markets. Even so, HL’s current year forecast P/E of 38.4 and skinnyish prospective yield of 2.4% — at a share price of 1,498p — appear distinctly ungenerous.
I find it hard to see HL’s P/E moving a great deal higher, which leaves earnings growth as the main driver for any rise in the shares. As HL says, “future stock market levels and investor confidence” are big factors in the company’s performance. So, I think we’d need an outstanding 2016 on both scores for HL to repeat 2015’s impressive share price gain.
