Goodbody tips defensive stocks among small-caps

Investors seeking to make money out of smaller Irish companies should stick with so-called defensive stocks such as IAWS, Paddy Power and United Drug, according to a report by Goodbody Stockbrokers.

For anyone feeling a little more adventurous, the stockbroker recommends C&C, Eircom and Greencore.

"For investors seeking exposure to smaller-cap markets, we believe that the best strategy is to stick to quality stocks with defensive characteristics," Goodbody said in its annual smaller-companies review released yesterday. "We also recommend some speculative plays with limited downside."

While Irish small-cap companies have outperformed their larger rivals in recent times, their outlook is currently less promising than it has been for several years, Goodbody says.

Last year, the smaller-caps index rose 27.4 per cent, outperforming other international indexes. Still, this may change as interest rates start to rise and currencies fluctuate less than in recent years, the stockbroker says.

A falling interest-rate cycle and large currency fluctuations tend to encourage outperformance among smaller companies, according to Goodbody. Moreover Irish smaller companies are starting to look expensive, trading at a 10 per cent premium where they historically would have traded at a significant discount, it said.

Still, Irish smaller companies offer "several opportunities," according to Goodbody.

The robustness of the Irish economic backdrop will offer some stability to earnings even if growth in international markets slows, it says.

The stockbroker is forecasting that the Irish economy will continue to sharply outperform its European peers over the next two years with GDP growth of 6 percent this year.

According to Goodbody, IAWS, Paddy Power and United Drug all have impressive track records, strong growth outlooks and operate in sectors that are likely to remain relatively immune to any weakness in the external economic environment.

Meanwhile, the growth outlook for C&C, Greencore and Eircom is relatively stable but the outcome of certain events could trigger significant upside.

For the review, Goodbody looked at 20 Irish companies with market capitalisations between €100 million and €1.5 billion. The company is broker to Paddy Power.