Dare to look beyond the ordinary when picking stocks for a flutter in new year
Rather than identify some larger Irish stocks with which we may be all familiar, it might be more interesting at this stage of the year to examine some of the more eclectic holdings found in some Irish investment funds*.
It has long been argued that long-term oil market fundamentals support a secular shift to alternative energy. The 30 per cent gain in the crude oil price over the last 12 months only serves to bolster such an argument. With this in mind we believe that alternative energy presents an interesting investment opportunity going forward. Integrated Spanish wind power service provider Gamesa is our preferred play in this space.
The group is one of the top three players in the attractive wind power industry which is expected to grow by between 15 and 20 per cent annually over the next five years. While 2005 could be characterised as a year of transition for the group, further international expansion, particularly into the US and China, supports growth prospects over the medium term.
Next year should see the group deliver 14 per cent earnings growth while the stock trades on a forward 2006 price/earnings ratio of just under 13 times. We believe that this fails to justify the group's strong growth prospects and that longer term the stock could even present an attractive takeover or break-up candidate.
Long known as a basket case in terms of profitability, finances and medium-sized cars, we sense a turnaround in all factors at long-troubled Italian car manufacturer Fiat. Although we do not expect Fiat's road to recovery to be without its bumps, we believe that newish CEO Sergio Marchionne will be able to revitalise the company. The restructuring of Fiat Auto continues to impress and the group has built strong momentum in results.
Following the conclusion of a complicated tie-up with General Motors the company can now boast a healthy cash position of €1 billion. The early launch of the new Punto last September pushes the company into a period of strong product cycle effects and its success will be key to share price upside. Valued at just 20 per cent of forecast 2005 sales, there is significant upside if the Punto takes off, while the hidden ace is a possible flotation of the company's Ferrari and Maserati holdings.
Digital technology has now become the dominant force in consumer electronics and in just a few short years it has become a multibillion dollar market. The technology is now found in an array of devices including, mobile phones, MP3 players, digital cameras and DVD players. With the market set to continue its strong growth trajectory, Wolfson Microelectronics, a leading supplier of semiconductor chips to the world's leading digital consumer product manufacturers (including Apple), is well placed to build on its impressive track record.
Profits have jumped more than tenfold since 2002. The group can boast a record order backlog and consensus expectations are for earnings growth of more than 20 per cent next year. With further expansion of the product offering likely to underpin a growing customer base, particularly in Japan, we feel that upside earnings surprises are likely to drive the shares higher over the next 12 months.
Helvetia Patria - "the FBD of Switzerland" according to our trusted Zurich contact - is another very interesting stock. Helvetia owns a very low-risk portfolio of insurance policies with mostly rural residents and little commercial exposure. It operates mainly in Switzerland but also has small operations in Spain, Germany and Austria.
Despite a decent run in the stock price over 2005, the shares still trade on just over 1.3 times' forecast 2005 book value and on a forward 2006 price/earnings growth ratio of less than one. We believe that this valuation fails to reflect the quality of the company.
United Drug, a leading provider of services to pharmaceutical retailers and manufacturers, is a growth company delivering compound annual earnings growth of 18 per cent over the last five years. That outperformance reflects a high-calibre management team delivering on a strategy of developing its niche markets, pharmacy wholesale and manufacturer outsourced services. United Drug remains the obvious long-term play on increased healthcare spending in the UK and Ireland.
Its defensive characteristics combined with growth trajectory make it one of the low-risk ways to gain an Irish healthcare exposure. The share price has stagnated in 2005, offering a good entry point, and further upside potential is underpinned by growth in higher-margin businesses, supportive demographics and increasing market share in long-term growth markets.
Overall we continue to see better value in banks that have greater corporate and international exposure. With annual profits in excess of $13 billion (€11 billion - nearly five times greater than both AIB and Bank of Ireland combined), HSBC is one of the largest banking groups in the world and fits these criteria nicely.
Despite its premium valuation relative to the European peer group, we continue to believe that HSBC remains attractive for long-term investors seeking a quality global bank with a solid dividend yield of more than 4 per cent. In addition to a strong presence in the UK and US, HSBC also offers attractive exposure to Asia-Pacific and South America - the exciting growth areas of the future.
Pramit Ghose is head of Bloxham's wealth management division.
* Please note that at the date of writing, Bloxham Funds had a holding in all of the stocks mentioned above.