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Four Stocks To Watch After 2023 Rally

Last Updated January 3, 2024 10:48 AM
Giuseppe Ciccomascolo
Last Updated January 3, 2024 10:48 AM

Key Takeaways

  • The stock market has just closed a brilliant 2023.
  • Investors are looking at equities for further growth.
  • Which stocks may shine in 2024? 
  • AJ Bell suggests four stocks for every kind of portfolio and investor.

The stock market experienced a significant rally in 2023, with major indices reaching new highs. As we move into 2024, investors are looking for stocks that have the potential to continue growing.

Investment platform AJ Bell has shared its view on the equity market for 2024. The company has highlighted four stocks that, it claimed, fit every kind of portfolio and investor.

UK Market Under Spotlight

AJ Bell  investment director Russ Mould said: “The UK stock market has, once again, frustrated those who were convinced it was cheap and lived down the expectations of those who asserted it was cheap for good reason. The FTSE All-Share’s 6% advance in 2023 lags that of most major indices and really only beats the Shanghai Composite and the Hang Seng, which are both down for the year.”

He added: “However, that gain is supplemented by a dividend yield north of 3.5%, share buybacks, and also mergers and acquisitions, so the total cash return will still be in the low double-digit percentage range. That beats inflation, government bond yields, and returns on cash.”

The takeover activity witnessed in the UK hints that there is value to be found, with many deals have been done at a big premium. As we enter 2024 the UK market may still feature stocks that could appeal to a range of investor requirements and risk appetites.

A Cautious Choice

GSK (GlaxoSmithKline)  has undergone significant structural changes, witnessed four upward revisions in profit forecasts over the past two years, and possesses a promising drug development pipeline. Surprisingly, these positive developments have failed to propel its shares in 2023. However, a deeper analysis reveals a compelling investment opportunity. The company, now exclusively dedicated to the development and sale of medicines and vaccines, positions itself to capitalize on long-term demographic trends, such as population growth in developing markets and increased longevity globally.

The inherent advantages of a successful drug development mode include relatively predictable demand, high margins, and consistent cash flow. Investors wary of potential recessions in the UK equity market might find solace in GSK’s resilient business model.

Mould said: “The earnings upgrades already reflect the impact of complementary acquisitions and GSK’s own ongoing drug development efforts and CEO Emma Walmsley is targeting compound trend sales growth of more than 5% a year and compound adjusted operating profit growth of more than 10% per annum, as profit margins expand from the 30% mark recorded in the first six months of 2023. Attainment of such goals would leave the stock looking cheap on barely 11 times forward earnings with a yield of 4.3%.”

One major factor contributing to the sluggish share price is the multitude of lawsuits linking the heartburn drug ranitidine (Zantac) to cancer. Despite legal challenges, the current low valuation incorporates a significant amount of negative news. Notably, dismissals of lawsuits in Florida and Canada, coupled with a settlement in California where GSK did not admit liability, have mitigated the adverse impact. The initial fears surrounding legal cases in 2022 led to a share price decline. However, subsequent developments indicate a more favorable scenario than initially perceived.

In summary, GSK’s recent performance might not fully reflect its underlying strength. With a focus on medicine and vaccine development, coupled with strategic acquisitions and a clear growth strategy, GSK presents an investment opportunity, especially considering its current valuation of industry peers. While legal challenges persist, recent positive developments suggest the company is navigating these obstacles effectively.

LGEN Is For Balanced Portfolios

Despite a sluggish 2023, Legal & General shares grapple with the UK stock market amid concerns about higher interest rates. Signs indicate that the era of elevated borrowing costs may be ending. The company’s financial performance in the year has highlighted positive outcomes from higher interest rates.

Legal & General Investment Management (LGIM)  has drawn negative attention in 2023. Share stagnation is linked to net outflows influenced by market volatility. Dissatisfaction with fund performance, coupled with the lackluster performance of the UK stock market, contributes to withdrawals by savers. Furthermore, individuals may be liquidating investments to meet financial obligations in the prevailing inflationary environment.

It’s important to note that LGIM constitutes only 13% of the first-half divisional operating profits. In contrast, the institutional pensions business (LGRI) is thriving, contributing 40% to the group’s first-half operating profit. The surge in demand for offloading pension risk through bulk annuity agreements has positioned LGRI favorably. Following the full buy-in deal with Boots in November, Legal & General has successfully undertaken £13.4 billion in UK pension risk transfer (PRT) in 2023, a notable increase from £8.3 billion in 2022 and £7.2 billion in 2021.

Legal & General’s current modest valuation, along with an anticipated 8.5% dividend yield in 2024, creates an opportunity for capital appreciation and income generation. Management’s pledged 5% annual increase in shareholder distribution enhances this attractiveness. The company’s robust first-half Solvency Ratio of 230%, surpassing regulatory requirements, underscores its strength and stability. Positioned for growth as higher interest rates potentially drop, Legal & General becomes a prospect for investors seeking value and resilience.

What For An Adventurous Journey?

Emerging markets currently find themselves in a period of disfavor. This sentiment extends to UK-based fund management firms, particularly those whose portfolio performance has trailed behind industry peers and essential benchmarks. This prevailing trend sheds light on the subdued valuation of shares in Ashmore . This specialist money manager focuses on emerging markets, but its current share price is reminiscent of 2009 levels. However, this scenario might present an opportunity for contrarian investors with a higher risk tolerance to delve deeper into the prospects of this FTSE 250 member.

Mould said: “Unloved can mean undervalued, after all. The 16.9p-share dividend looks well backed, and equates to an 8% yield, while there is a net cash pile to provide support to the company’s £1.4 billion stock market valuation.”

Certainly, the management’s decision, disclosed alongside the full-year results in September, to outline the terms of the bonus pool payout ratio in favor of staff, potentially impacting profits and shareholders, raises valid concerns. However, there are indicators suggesting a more promising outlook for emerging markets. Notably, emerging market central banks demonstrated agility compared to their developed counterparts in identifying the threats posed by inflation and promptly implementing rate hikes. Now, they are reaping the benefits. This is evident in interest rate cuts from countries such as Peru, Hungary, Paraguay, Chile, and Poland. Additionally, the possibility of tax reforms in Brazil and the prospect of a new approach in Argentina contribute to the positive narrative.

Discussions about an economic collapse in China seem speculative, and the likelihood of such an event appears unsubstantiated. Furthermore, the weakening of the dollar, especially as the US Federal Reserve approaches the zenith of its hiking cycle, could prove advantageous. This potential benefit aligns with the historical inverse relationship between the greenback and emerging equities. As these factors converge, there seems to be a glimmer of optimism for the future of emerging markets, encouraging investors to consider the potential opportunities that may arise.

Income Seekers May Look At Lancashire

Mould said: “With the valuation low, balance sheet strong and pricing firm, further positive total returns via share price gains and dividends remain quite possible from Lloyd’s of London insurance specialist Lancashire.”

Lancashire , the manager of Lloyd’s of London syndicate, has robust performance in 2023. It registered a noteworthy 23% increase in gross premiums written during the first nine months of last year. This growth stands as a testament to the firm’s prowess in specialized areas such as property insurance, reinsurance, aviation, terrorism, and political risk. Despite natural disasters in the US, New Zealand, and Turkey, Lancashire has managed to avoid substantial losses. The impact of higher interest rates and bond yields has further contributed to enhanced returns on its substantial $2.5 billion investment portfolio.

Lancashire has recently initiated a $50 million share buyback program. This move is indicative of the company’s confidence in its financial strength. More appealingly for investors, the company has distributed its first special dividend since 2018. The $0.50 payout, represents a substantial $119 million (£97 million). Analysts’ forecasts hint at a total dividend of $0.83 in 2024, translating to a 10.6% yield and suggesting the potential for more dividends in the future.

While acknowledging the inherent risks associated with unforeseen events, including those related to climate change, Lancashire remains proactive in managing potential challenges. The firm oversees Lloyd’s syndicates 2010 and 3010 and is laying the groundwork for future growth with the launch of Lancashire Insurance US in 2024. Since its listing in 2008, Lancashire has consistently delivered dividends totaling just over 878p a share. This stands favorably against the current share price. With a commitment to maintaining attractive yields and the prospect of continued growth, Lancashire appears poised to re-establish itself as an enticing option for investors seeking stable returns.

Disclaimer

Please note that the contents of this article are not financial or investing advice. The information provided in this article is the author’s opinion only and should not be considered as offering trading or investing recommendations. We do not make any warranties about this information’s completeness, reliability and accuracy. The cryptocurrency market suffers from high volatility and occasional arbitrary movements. Any investor, trader, or regular crypto users should research multiple viewpoints and be familiar with all local regulations before committing to an investment.

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