Back in June we recommended 5 stocks in the FTSE 100 as the
best stocks to buy. Top of that list was Standard Life which returned 40%
profit in 5 months. The average of the 5 stocks was over 14% which compared
well to around a 8% increase for the FTSE100 index.
Since then we have refined our model to take account for
retained earnings which you can read about in the post "The problem with dividends".
Using this adaption to the method still gives us the same
basic valuation formula:
Total Expected Return = True Yield + Growth Rate -
Adjustment Rate
Where:
True Yield = Dividend Yield + ((Earnings Yield -Dividend
Yield) / 2 )
Note: The earnings yield is simple 1/PE ratio.
Growth Rate = Annualised forecast dividend growth rate for
the next two years discounted by 50%
(e.g. if analysts forecast a 10% annual
growth rate we will use a 5% growth rate in our model to give us a margin of
safety)
Adjustment Rate = ((True Yield / 6.5%) ^ 0.1) - 1
The value of 6.5% in our formula is seen as "fair"
value. Stocks with True Yields below this will be penalised for being
overvalued by the market. Only negative values for the adjustment rate are
used.
The list filters out stocks that are down-trending currently
and stocks with large amounts of insider selling.
The Top 5
Stock
|
Ticker
|
Expected annual return
|
BP
|
BP.L
|
17.8%
|
Resolution
|
RSL.L
|
16.8%
|
GKN
|
GKN.L
|
14.8%
|
Legal & General
|
LGEN.L
|
13.1%
|
AstraZeneca
|
AZN.L
|
12.3%
|
The list includes two insurance companies, an oil giant, an
engineering firm and a pharmaceutical company.
BP (436p)
With a market cap of £82b BP is currently the second biggest
stock in the FTSE100 index after HSBC. The stock currently pays a decent
dividend of almost 4.2% on a PE valuation of just 5.1. Over the last 12 months
the directors have been purchasing nominal amounts of the company stock.
After a downtrend at the beginning of the year the stock
recently broke its 100 day high in mid October. Its recently pull back off its
highs but remains in an uptrend at present:
Resolution (237p)
Insurance company which owns Friends Provident and AXA Sun
Life. The current dividend yield is a massive 8.5% with a PE of 4.7. The
forecast for the dividend growth is also positive with a consensus of 21.47p
for 2013, up from 19.89p in 2011.
In the past few days Resolution has also broken its 100 day
high signaling the potential beginning of an uptrend:
GKN (211p)
GKN is an engineering firm that is produces drive shafts and
axel joints for the automotive industry. With a market cap of only £3.4b this
is one of the smaller stocks in the FTSE100 index. It currently has a dividend
yield of over 2.8% and a PE ratio of around 9.3. The current consensus for 2013
is a dividend of 8.07p, up from 6p in 2011. In the last 12 months insiders have
made net purchases of the company's stock totaling over £750,000.
Its share price broke its 100 day high in mid August and has
pulled back a bit since then but remains in an up-trend:
Legal & General (143p)
LGEN is a
long running life insurance company with operations in the US and Europe with
its main business in the UK. The current dividend yield is a decent 4.5% with a
PE ratio of 11.4. In the last 3 months the insiders have been purchasing
nominal amounts after some big sell offs earlier in the year totaling almost £2m.
The company has a good track record of increasing dividends albeit it did lower
its dividends slightly during the financial crisis in 2008-9.
LGEN is
currently on a strong uptrend:
AstraZeneca (2865p)
The
British-Swedish pharmaceutical giant gets half its sales from the US. With a PE
of 6.3 and a dividend yield of 6.1% the stock looks good value. The company has
a very good record for increasing dividends and the forecasts going forward
also look favourable. The past 3 months has seen nominal insider buying but it
remains negative for the past 12 months.
The stock
is currently on an uptrend after breaking its 100 day high in mid July. Since
then the price has fallen back a little:
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