I’ve been popping stocks into my shopping trolley in recent weeks and it’s time I took one or two to the checkout. Here are five tempting stocks from May. Should I buy any of them?
When I reviewed Intu Properties (LSE: INTU) in late May, I decided this was a shopping trip to avoid. Intu was pouring millions into rebranding its retail centres, which include Lakeside at Thurrock, Metrocentre in Gateshead and the Trafford Centre in Manchester. It was also spending heavily on promoting mobile-enabled website Intu.co.uk as a top shopping destination. The share price was in freefall, however: footfall was down and occupancy rates lower than at rival Hammerson. Worryingly, most of its centres are outside affluent London and the south-east. I was right to be sceptical — the share price is down 7.4% since then to £3.13, against a 1% drop on the FTSE 100. After a disappointing first half, Goldman Sachs cut its rating from ‘neutral’ to ‘sell’. Intu could benefit from rising consumer confidence, but at 19.5 times earnings, I don’t like the price tag.
International Consolidated Airlines Group
In May, International Consolidated Airlines Group (LSE: IAG) brought out my innate fear of flying. The airline, formed by the merger of British Airways and Iberia in January 2011, was facing twin headwinds, investing heavily in its UK operations and cutting costs at its ailing Spanish wing. It had just posted a €278 million operating loss, although chief executive Willie Walsh saw this as “encouraging”. Today, the stock looks a flyer. It is up 10% in the past three months, and has doubled over the past year. Half-year results exceeded expectations, with a Q2 operating profit of €245 million, a dramatic improvement from the €4 million loss in the same quarter last year. IAG had reached agreement with unions at Iberia, and was predicting plus 5% growth across the year. A raft of brokers, including Deutsche Bank, Barclays Capital, HSBC, Citigroup and Credit Suisse all have it as a ‘buy’ or ‘overweight’. Given the impressive turnaround, it isn’t hard to see why. Especially with the stock on a whopping 192% forecast earnings per share (EPS) growth in 2014. I only wish I’d bought at the moment of maximum fear.
Management at Babcock International (LSE: BAB) were bullish back in May, and rightly so, after posting a full-year 6% rise in underlying revenue to £3.24bn and a 14% leap in operating profits to nearly £377m. Everything seemed to be going in its favour, even a cut in defence spending, which could lead to more outsourcing. Despite a 106% rise in the share price over three years, Babcock still looked a tempting buy. The share price has dipped 1.7% since then, in line with the FTSE’s slide. An interim management statement in July was positive, with business units trading strongly, activity levels high, and the order book and bid pipeline stable, giving “excellent visibility of future revenue”. Trading at 16 times earnings, it isn’t cheap, but it still looks a buy and long-term hold to me.
A solid portfolio hold, but hardly a raging buy. That’s how I described engineer Smiths Group (LSE: SMIN) in May, after it had released a market-pleasing rise in underlying revenue across all five divisions for the previous nine months. The share price is down 5% since then, after a disappointing trading update in early July, which saw management downgrade its full-year operating profit forecasts by around £15 million, largely due to problems at its Detection business. Plans to sell its medical division for £3 billion have since collapsed. The group is also exposed to defence spending cuts in the US. On the plus side, emerging market sales were up and the dividend was increased, although it only yields 2.9%. At 14.1 times earnings and a forecast 6% EPS growth to 31 July 2014, Smiths still looks a solid portfolio hold, but guess what, hardly a raging buy.
Tui Travel (LSE: TT) has come a long way in the past two years, with its share price flying nearly 144%. Its Q3 results, published in August, showed an 18% rise in underlying operating profits due to strong demand across key markets. Yet the market was underwhelmed, and the share price has gone nowhere lately. I feel the market reaction was harsh, but Tui has lost its blistering momentum for now. But with forecast EPS growth of 12% to 30 September 2013 and 10% the year after, I’m still tempted to hop on board.
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> Harvey doesn’t own any of the shares mentioned in this article.
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