2015 has been a year of turmoil, so will we see a more sedate FTSE 100 next year? We can’t possibly know, but there are some top companies that I reckon could be in for a good 12 months.
One of my candidates is ARM Holdings (LSE: ARM), the designer of chips that are powering a great swathe of our mobile computing devices. Now, ARM’s shares have soared by 32% since late August to 1,105p, so you might be thinking I’ve missed the boat. But that was after a sluggish spell that has seen the shares gain less than 10% in two years — and earnings are rising strongly, and that has depressed the stock’s P/E multiple.
With the long-term FTSE average being around 14, you might not think that a prospective P/E of 37 (dropping to 32 on 2016 forecasts) is any great bargain. But for ARM, with its phenomenal growth record, that’s historically pretty low.
And at third-quarter time, there was no sign whatsoever that all those years of growth are set to slow — normalised EPS was up 29% after dollar revenues grew by 17%. For years I’ve been saying we’re really still in the early days of the mobile computing revolution and that there’s massive potential growth out there — and I say that’s still true today.
Undervalued insurance
Now on to one of my favourites, Aviva (LSE: AV). The financial sector is only slowly coming back from the bruising it has taken in recent years, with investors still unsure about the future limits of naughty-behaviour costs — and there’s very little the City hates more than uncertainty. But that’s really the banks, though the insurance sector is being held back too, and I’m seeing some pretty good bargains in the sector.
Aviva has rebuilt its capital position faster than I’d expected, and after an impressive return to rising profits over the past two years, we have a couple more steady years forecast with well-covered dividends set to yield 4.1% this year and 4.8% next. The share price, at 510p, hasn’t really budged over the past 12 months, and I reckon the resulting P/E of around 11.5 (and dropping to 10.5 next year) means the shares are significantly undervalued — and I’ll be surprised if we don’t see an upwards re-rating in 2016.
Pharma turnaround
My third choice is AstraZeneca (LSE: AZN), which has seen the wheels come off its drug development progress in recent years due to the expiry of key patents and increasing competition from generic alternatives. The result was that new CEO Pascal Soriot was drafted in to reverse the decline, and he spearheaded a policy of dispensing with non-core business and focusing hard on rebuilding the drug development pipeline.
The Soriot effect put some oomph back into the shares, but that’s tailed off a bit of late — and the price has lost 5.4% in the past 12 months, to 4,488p. A lot of that is surely because people are impatient, but the turnaround was always going to be slow — the firm has always said it did not expect to get back to earnings growth until 2017 at the earliest.
Why might 2016 be a notable year? Well, it should be a year in which we start to get a solid feel for how 2017 is likely to turn out and when that return to growth is really likely to happen. And if we get a growth forecast, we could see a boost to the shares, currently on a modest P/E of 16 (and with dividends still yielding more than 4%).
