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3 Top Picks For 2016: Lloyds Banking Group plc, Persimmon plc And Jupiter Fund Management plc

I like to mark the start of a new investment year by reviewing and sharing a few top picks that should do well over the next 12 months.

I won’t be recommending interesting and under-researched micro-caps or stocks that promise the world on a plate. I like businesses that make money, are well-established, and should be trading well long term, not just the next 12 months. This approach has served me well and I believe it will continue to do so in 2016 and beyond.

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Here are three well-established UK-focused businesses. One kept pace with the FTSE 100 this year and the others outperformed it by some margin. Let’s find out what makes me think they’ll outperform in 2016…

Banking on a better 2016

2015 started well for Lloyds (LSE: LLOY) with the shares ahead of the FTSE 100 by some margin in the first half. But they fell in August with the rest of the market during the start of the on-going market volatility.

Plus there was an ill-received Q3 update guiding investors to expect lower income than 2014, the main sticking point being a 7% reduction in other income. It had started to recover in Q4, but not enough for the growth investors hoped for.

The shares sold off on the day and slipped below 70p briefly earlier this month. However, they’ve regained their composure over the last few trading days.

Heading into 2016 with a forecast P/E of less than 10 times earnings, a forecast 5% dividend yield, and a tangible book value of just over one – they look quite good value. Add into the mix the upcoming retail interest in the spring and the potential rise in interest rates, and they could well outperform if the economy holds firm.

Building on success

2015 was a very good year for investors in FTSE 100 housebuilder Persimmon (LSE: PSN). In addition to the 95p per share dividend paid in April, the shares have easily beaten the market. But can this continue into 2016?

While housebuilders are exposed to the health of the economy, I believe the shares can make further progress in 2016.

True, house prices are not cheap and I believe there’s less room for unsustainable rises than we’ve seen since the financial crash. However, the government supports house ownership, there’s still a chronic house shortage, and a good appetite for new houses from prospective buyers.

Add to the positive environment a below-market-average forecast P/E of around 12 times earnings and a market-beating 5% yield and I believe that there’s still room for the shares to increase over the coming year.

Jupiter ascending

Another winning share in 2015 has been Jupiter Fund Management (LSE: JUP). With the shares trading at nearly 16 times earnings, they don’t scream bargain. But it can pay to buy quality.

Indeed, the ROCE (Return On Capital Employed), ROE (Return on Equity) and operating Margin are all in the top 10% of the market. Who says fund management doesn’t pay? These ‘quality’ metrics all add up to a business with a defendable moat, just what Warren Buffett looks for in companies.

This quality shone through when management updated in October. Even with the challenging market backdrop at the time, it still reported a 5% increase in AUM (Assets Under Management) for the first nine months.

Finally, analysts expect the company to continue to distribute excess cash to shareholders going forward, which means they could net a 5%-plus yield with the shares trading at around 455p.

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Dave Sullivan owns shares in Persimmon. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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