Thursday, 8 November 2012

The Top 5 FTSE100 Stocks to Invest in Now

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


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

Expected annual return
Legal & General

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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