If you’re looking for stocks that could be poised to make stellar gains in 2016, here are three of my high conviction growth picks.
Opportunity knocks
Unilever’s (LSE: ULVR) shares have traded range-bound for much of 2015, thanks to a mix of favourable tailwinds and negative headwinds. Slowing emerging market growth and adverse currency movements have caused earnings growth to slow. But on the other hand, Unilever is also seeing good organic growth, accompanied by margin expansion for many of its personal care brands.
Currently, personal care makes up 37% of Unilever’s total revenues, but the company expects this share to rise to 50% over the medium term. That’s good news as the personal care market is growing faster than the food market. Also, Unilever expects greater opportunities for product innovation and brand development, at which it has proven to be particularly adept.
With its shares trading at a forward P/E of 21.1 and yielding just 2.5%, Unilever’s valuations may not seem particularly attractive. But we have to bear in mind that quality never comes cheap. Moreover, Unilever is trading at a discount to some of its peers. Reckitt Benckiser, which competes in food and home care products, trades at a forward P/E of 25.8, while the French personal care goods giant L’Oréal trades at 25.1 times its expected 2015 earnings.
Powerful pipeline
Biopharmaceutical company Shire (LSE: SHP) has benefited from some well-timed acquisitions and successful breakthroughs in developing treatments for rare diseases. Underlying earnings have more than doubled over the past three years and its shares have risen by 122% over the period.
Shire’s success story may have further to go. With strong revenue growth and cash generation, Shire is once again on an acquisition spree to bolster its pipeline of new drugs. It’s currently looking at buying Dyax, a US biotech firm, for $6.5bn. Dyax has a promising late-stage developmental drug, DX-2930, which could treat patients with hereditary angioedema (HAE) and has potential global sales of up to $2bn annually.
Indeed, analysts expect Shire’s underlying EPS to grow by an average of 11% per year over the next five years, even before we take account of its latest acquisition target. Its shares trade at a forward P/E of 17.1, which isn’t bad for a company with double-digit earnings growth.
Long road ahead
Shares in Sirius Minerals (LSE: SXX) have risen 50% since the start of the year but they remain good value. The potash company has benefited from positive news flow over the past year, including the gain of all key town and country planning approvals for its York Potash Project. The company is closer to beginning production but there’s still a long way to go.
Sirius still needs to raise as much as £2bn to finance the three-year construction phase and initial production isn’t expected to start until 2018 at the very earliest. What’s more, fertiliser prices, which have been in freefall recently, could be much cheaper by the time production starts, potentially undermining the investment case.
But once developed, Sirius Minerals will likely be in a strong competitive position. The polyhalite it’s looking to mine could be a fertiliser game-changer as it’s a much cheaper potassium source than existing potash sources.
City broker Liberum Capital has a 38p price target on the stock, which indicates a potential upside of 138%. Be careful though, investing in Sirius Minerals carries a very high level of risk.
