Stock picking can be an excellent way to avoid the worst of a market correction.
For example, shareholders in easyJet (LSE: EZJ), Homeserve (LSE: HSV) and BT Group (LSE: BT-A) have seen decent gains over the last 12 months, despite the FTSE’s decline:
|
Company |
12-month change |
|
BT Group |
+30% |
|
HomeServe |
+14% |
|
easyJet |
+13% |
|
FTSE 100 |
-6.5% |
Can these high performers continue to beat the market next year, or could now be a good time to take profits?
easyJet
Shares in easyJet slipped lower this morning, despite the firm reporting a record pre-tax profit of £686m for the year ending 30 September, an 18% increase on last year.
One reason for this could be that this profit figures was towards the lower end of the £675-£700m guidance range the firm provided in September.
Another possibility is that the market thinks easyJet’s profits may be peaking. Airline performance tends to be cyclical and easyJet’s post-tax profits have now risen by 670% since 2009.
However, easyJet’s operational performance still seems to be supporting profitable growth. The firm’s pre-tax profit margin rose from 12.8% to 14.6% last year, while seat occupancy rose by 0.9% to 91.5%, despite a 5% increase in seating capacity.
2015 forecasts imply a forecast P/E of 11.5 and a prospective yield of 3.7% for easyJet shares. Further gains are possible for shareholders, although I think growth is likely to slow.
HomeServe
After running into problems a few years ago, home repair and installation group HomeServe has recovered strongly. Today’s results show that during the first half of this year, customer numbers rose by 24% to 2.1m in the, while remaining flat in the UK.
Adjusted earnings per share rose to 6p during the first half, up from 5.6p for the same period last year. The interim dividend was increased from 3.63p to 3.8p, but net debt rose sharply to £202m. Worryingly, £99m of this increase was the result of the firm’s decision to pay a special dividend of 30p per share last year.
I don’t agree with companies using debt to fund shareholder payouts in this way, as it seems unnecessarily risky and often leads to problems in the future.
HomeServe shares also look relatively expensive to me, as they trade on a 2015/16 forecast P/E of 19.9, falling to 17.8 in 2016/17. In my view, there are better buys elsewhere in today’s market.
BT Group
BT Group has been one of the top performers in the FTSE 100 over the last year. The shares have gained 30% over the last 12 months as double-digit dividend growth and strong free cash flow has attracted new investors.
BT shares now trade on 15.9 times this year’s earnings and 14.9 times next year’s. The strong share price performance has pushed the forecast dividend yield for the current year down to 2.9%.
However, the big story is the firm’s plan to acquire EE, which owns the Orange and T-Mobile networks, for £12.5bn. This deal has now received provisional approval from the competition authority.
Combining BT’s existing business with EE will make BT the largest mobile operator in the UK. It will give BT the opportunity to create a new generation of integrated mobile, broadband and television services.
It’s a risk which could disrupt profit and dividend growth, but it could pay rich rewards in the long term.
