Why Cineworld Group plc, Burberry Group plc And AstraZeneca plc Could Beat The Market In 2016

Roland Head explains why Cineworld Group plc (LON:CINE), Burberry Group plc (LON:BRBY) and AstraZeneca plc (LON:AZN) have the potential to deliver market-beating total returns.

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Pre-tax profits rose by 37% to £93.8m at cinema chain Cineworld Group (LSE: CINE) last year, thanks to continued growth and help from blockbusters such as Spectre and Star Wars: The Force Awakens.

Shareholders were rewarded with a 30% hike in the dividend, which has been increased to 17.5p. This gives Cineworld stock a trailing yield of 3.6%.

Cineworld has been a big success for growth investors. The firm’s shares have risen by 130% over the last four years, during which profits have tripled. It’s probably fair to expect that growth will be slower from now on. Current forecasts suggest that earnings per share will rise by 9% next year, a far cry from this year’s 29% rise.

It’s not necessarily the right time to sell, however. Cineworld has managed to expand aggressively, while keeping debt under control and steadily increasing the dividend. Shareholders who paid 212p for their shares in March 2012 are now enjoying a dividend yield on cost of 8.2%!

Cineworld has been well managed and may continue to beat expectations. I’d sit tight for now.

Burberry

Luxury fashion firm Burberry Group (LSE: BRBY) bounced higher on bid rumours earlier this week. These turned out to be unfounded and the shares have dropped back down to their previous level.

Burberry fell last year on fears of slowing Asian growth, but this risk may have been overstated. In January, Burberry said that sales in mainland China had “returned to growth” and reported flat like-for-like sales for the third quarter.

I believe Burberry remains an attractive, quality stock. The group’s operating margin has so far remained stable at 17.5%. Burberry also has net cash of £458m, which is equivalent to 16 months’ profits. Although the 2.7% dividend yield isn’t especially high, it is generously covered by free cash flow and should be bulletproof for the foreseeable future.

The market’s response to this week’s events also suggests to me that Burberry could be a credible bid target. The shares remain a medium-term buy, in my view.

AstraZeneca

The UK’s second-largest pharmaceutical stock has drifted steadily lower in recent months. AstraZeneca (LSE: AZN) shares are worth 7% less than they were three months ago and 15% less than when they peaked during Pfizer’s takeover attempt.

Some investors may now be wishing that AstraZeneca’s management had accepted Pfizer’s advances. I’m not so sure. The fall in AstraZeneca’s profits finally seems to be flattening out. Under chief executive Pascal Soriot, the group’s new product pipeline has improved significantly.

AstraZeneca stock currently trades on 14 times 2016 forecast earnings, which seems reasonable. The group’s operating margin rose from a low of 8% to a more normal 17% last year. If the group can lift margins again over the next couple of years, profits could rebound strongly.

In the meantime, shareholders can look forward to a 4.7% yield. The dividend has been maintained since 2011 and is now covered 1.5 times by forecast earnings. With the outlook for the firm finally starting to improve, I think a dividend cut is now very unlikely.

In my view, AstraZeneca could be a good long-term buy at current prices.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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

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