Thousands of firms are hoping for a swift return to health after a gruelling 2020, and experts are saying the Brexit deal, vaccine roll-out, and a new president in the White House, both the UK and global economies will have new life in them soon. But not all businesses will recover quickly. So what are the best share market tips, and how can investors spot the difference between a cheap stock set to soar or one that is unlikely to gain value any time soon?
Experts say companies affected negatively by the spread of the virus fall into two camps — boomerangs and zombies. Boomerangs are well-positioned to bounce back quickly, whereas zombie companies, which are by no means doomed, are not expected to make such a speedy recovery.
Ready to rebound
Hospitality, travel, and leisure were among the hardest hit industries during the pandemic. But John Moore, senior investment manager at wealth management firm Brewin Dolphin, says several firms in the sector should make a solid recovery.
SSP Group and Diageo are on his boomerang list. SSP is a food and beverage company that owns chains in train stations and airports, nationally and abroad. Its brands include Upper Crust, Millie’s Cookies, Caffe Ritazza, and Camden Food Co.
Although its share price is more than 50 per cent lower than its February peak, it has risen by 75 per cent since November to 326.6 pence. And if, and when, passenger numbers increase, its recovery should continue.
Catering company Compass Group is in a similar position. The purchase of digital food platform Feedr in March has given the firm space to grow in a new direction but its core business is dependent on a return to sports, events, and offices.
Experts have also flagged IHG, owners of Intercontinental Hotels and Holiday Inn, as a boomerang stock. The firm had started expanding into Asia and the U.S. before the pandemic, and bookings are already strong as Chinese and American families are forced to holiday on home soil.
But investors should be careful not to assume all leisure businesses will bounce back quickly.
Unlike boomerangs, ‘zombie’ companies are less likely to bounce back the moment their industry is up and running again. These firms might have complicated business models, carry a lot of debt, or have a history of mistakes.
Mr Moore says Royal Bank of Scotland, Lloyds Banking Group, BT, and Royal Dutch Shell could all be zombie stocks. He continues to say that after a series of setbacks since the last financial crisis, the big banks still need to better reduce costs and strengthen online security before they’d be a safe bet.
Meanwhile, BT made a series of U-turns recently over mergers and expansion, and oil firm Shell is being challenged by the world’s move to renewable energy sources. On this, Mr Moore comments: “I’m not saying these firms cannot turn things around, but investors need to see evidence improvements have been made before they are persuaded to invest.”
Ryan Hughes, from investment broker AJ Bell, says retail and property were both zombie sectors. Firms such as Debenhams and Arcadia did not survive the pandemic and property company Intu, owners of shopping centres, was also a casualty.
Back a boomerang
Mr Hughes recommends Fundsmith Equity, managed by Terry Smith, for investors who want exposure to Intercontinental Hotel Group (IHG), as the fund invests in stocks that have strong brands.
Brewin Dolphin suggests Ninety One UK Alpha, managed by Simon Brazier, for investors who want to back a host of boomerang companies such as Diageo, easyJet, Ryanair, IHG, and Booking.com.
The fund, which has turned £10,000 into £12,310 over the past five years, does hold BT and Shell stocks because while they are not expected to recover quickly like a boomerang, the long-term prospects are still good.
Teodor Dilov, fund analyst at Interactive Investor, likes R&M UK Recovery. It specialises in recovery stocks which it says are good businesses currently experiencing below-normal profits that have driven down the share price.
What is a penny stock?
Penny stocks or penny shares are common stock that trade with a share price below £1. The companies will also have a market cap below £100 million. As they are small, low-valued businesses, they offer higher risk and reward to traders.
Penny stocks are regarded as a more speculative investment than larger businesses because they are geared for growth, with many yet to generate any income or develop a viable product or service. In the UK, penny stocks are listed on the FTSE AIM index.
Examples of UK penny stocks to watch in 2021
Galantas Gold Corp
Galantas Gold Corp is an Irish mining company with a dual listing on Toronto’s TSX Venture Exchange and the FTSE AIM All-Share in the UK.
Galantas owns and operates a producing open-pit gold mine near Omagh, County Tyrone, Northern Ireland, and also produces silver and lead as a by-product. The company’s mine has received planning permits to continue to mine underground with about a kilometre of underground development completed in December 2020.
Part of a drilling exploration program was completed in 2020, with a significant increase in resources discovered. The company intends to continue that program in 2021 – which could be a reason for its meteoric share price increase.
Maestrano Group is a data analytics firm that has patented cloud-based platforms used by key sectors, such as banking, with products ranging from business intelligence to data visualisation. It has expanded into the infrastructure sector, targeting the likes of road, rail and energy networks, since buying engineering surveyor AirSight in 2019.
The company signed several deals in 2020 and expanded its reach by securing new distributors for its technology. For example, Network Rail has awarded a contract to the business for its automation technology. Plus, in July 2020 it signed up its first North American distributor for its Nextcore subsidiary that designs and makes lightweight drones, and a new joint distribution deal with a Dutch company that ‘is expected to substantially increase the distribution networks and sales volumes for both companies.’
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