As the UK’s most popular fund manager, when Fundsmith’s Terry Smith sells top British stocks it’s worth paying attention.
In November, he dropped consumer goods giant Reckitt (LSE: RKT), formerly Reckitt Benckiser Group, from his flagship investment fund Fundsmith Equity. In February, he ejected quality assurance provider Intertek Group (LSE: ITRK), which I wrote about recently and said looked pricey but still a long-term buy for me.
Last month, it was the turn of Sage Group (LSE: SGE) to feel Mr Smith’s boot. He’s a supremely successful stock picker and it makes me wonder whether I should rule out buying these top British stocks for my own portfolio.
Would I sell these FTSE 100 stocks?
I have a personal interest, because Reckitt has long been one of my favourite FTSE 100 stocks. It promotes a broad portfolio of popular everyday brands such as Air Wick, Harpic, Dettol and Nurofen, that shoppers buy in bad times as well as good. I considered it a top British stock, even though it is relatively expensive. Today, it trades at 21 times earnings.
The Reckitt share price shot up in the early days of the pandemic, as people spent more on cleaning products, but then doubts set in. After November’s vaccine breakthroughs, investors decided other British stocks would reap greater rewards.
Reckitt is down 9% over the last year, and 7% over five years. It looks like Terry Smith has had enough. The forecast yield of 2.7%, covered 1.7 times by earnings, was not enough to tempt him to stay. Yet I would still consider Reckitt for my own portfolio, as a defensive stock delivering long-term growth and income. It recently posted a 4% rise in Q1 sales, while digital revenues jumped an impressive 24%. As it invests £2bn in developing new products, it remains a top British stock and would merit a place in my own portfolio, whatever Terry Smith thinks of it. If I’d already bought, I wouldn’t sell today.
Sage offers integrated accounting, payroll and payments solutions to businesses around the world. Four years ago, Goldman Sachs rated it a top British stock, as it migrated to a subscription-based model, which offered more cross-selling opportunities, and enjoyed high customer renewal rates.
Subsequent performance has been disappointing. The Sage share price is up just 5% over five years. It hasn’t even benefited from the recent stock market rally. Again, it looks like Mr Smith has had enough, but what about me?
I still rate these top British stocks
Last month’s first-half results showed underlying operating profit falling 11% to £191m, as profit margins shrank from 23.2% to 20.2%. This was primarily down to increased spending on marketing and product development, to promote its new cloud operation. Management said margins should improve, as this investment drives growth.
Personally, I like to see a company investing in its future, even if it takes a short-term hit. I also like the fact that Sage has been paying down debt, from £238m to £96m in the last year. It still looks like a top British stock to me. I would consider buying it for my portfolio, even if Mr Smith doesn’t have space in his.