Market fear is back. So, which shares could buck the trend in a declining market?
5 Names On The Radar
The shares of Royal Mail Group (LSE: RMG) and Aviva (LSE: AV) outperformed those of more cyclical businesses on Wednesday, when volatility began to rise, yet they gave up their gains on Thursday. GlaxoSmithKline (LSE: GSK) fared better than others and is worth a look. Its stock has proved resilient in the last couple of days of trading: it may have bottomed out. Ted Baker (LSE: TED) and Rentokil (LSE: RTO), meanwhile, also got my attention.
Looking For A Defensive Play
As market volatility springs back, it’s an uphill struggle for investors who must preserve returns to the end of the year. The VIX Index almost reached 18 on Thursday. Above 20, it’s not going to be a nice day in the office. Banks, food retailers, utilities, oil producers and miners have come under intense pressure, as one would expect.
In the last two trading sessions, the FTSE 100 index has lost more than 2.5% of value. Only a few shares have been holding up relatively well. That’s the case of GSK stock, for instance. Why so?
One reason is that the stock is not expensive. Another reason is that both opportunistic traders and value investors seem willing to bet on GSK at this level. Ted Baker, though, remains my favourite pick when it comes to value.
Royal Mail: An Opportunistic Trade
Opportunistic traders may be attracted to Royal Mail stock, given that it trades around the lows for the year (390p).
If recent trends are anything to go by, the shares of Royal Mail may trade in the 390p-450p range until the end of 2014, yet this is a bet for traders who want to make a quick buck. Royal Mail promises a decent yield, but its stock looks a lot like an overpriced bond, even at this price.
In its current form, I don’t think Royal Mail is a value proposition, although it may offer plenty of upside if management were willing to engineer a break-up. Unfortunately, that doesn’t seem a likely option at present. Trading multiples suggest that the shares are fully valued.
Aviva & GSK & Others: Are Steady Returns On The Cards?
I wouldn’t invest in the insurance sector right now, but I have been impressed by Aviva’s management in recent times. Not only are managers are pursuing efficiency; they may be able to grow the business in the next couple of years. The equity valuations of Aviva’s competitors aren’t particularly attractive, and Aviva promises to be a more stable investment than others. These are elements to like.
At GSK, meanwhile, management must regain pride. Yes, its shares are cheap by most metrics. And yes, its shares offer more value than those of rivals. Trust has gone out of the window, however. A positive trading update, or a large M&A deal, would be needed to boost confidence. In short, GSK is certainly a defensive bet offering a decent yield, and perhaps capital gains, but it should do more to become a stellar performer.
Operating on a different scale, and in a different sector, Rentokil could also create value for shareholders if management were fast to divest unwanted assets. Finally, here’s a company that offers plenty of value: Ted Baker. Management are showing how business is done in tough trading conditions. Strong results this week helped the stock rise in a declining market.
For me, Ted stock is still a buy at this level.
Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.