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BEST FTSE 100 STOCKS FOR 2022 AND 2023

26th April 2022

A total of 90 stocks were reviewed in the recently completed technical analysis of the FTSE 100 constituents. A few companies have de-listed since my first review in 2019, mostly due to takeovers. Therefore the number reviewed has been whittled down from 100 to 90. I will add the 10 new entrants to the technical review section at a later date.

The stocks with bearish (or negative) charts slightly outnumber those with bullish (or positive) charts at 49 to 41 respectively. This is further evidence of a new bear market for equities, so my new share recommendations in this article are cognisant of that, as it is always best to take the prudent view. Yes, these new recommendations may well underperform if the market manages to breakout of its current torpor. However, that is preferable to being heavily exposed if the recent weakness turns into a rout.

A further break downwards in the market is an unpleasant thought for those with large equity portfolios, so now is the time to make some changes by switching into more defensive stocks, and out of those that are looking more vulnerable.

Firstly, however, let's have a look at the FTSE 100 stocks that were previously recommended on this website, following the most recent technical and fundamental review done in May 2021.

A total of 9 stocks were recommended, and a breakdown of their performance can be found here - CLICK HERE.

The average gain per stock was 1.9%. That compares to a gain in the FTSE 100 index of 4.8% for the same period. Although that is a slight underperformance, it is actually quite a good result. This is because the overall market trend in the period, changed from being from bullish to bearish. Technical analysis always does best when the trend continues, and will inevitably underperform, at first, when the trend changes.

Some of these stocks were repeat recommendations, and their overall performance since the date they were first recommended, still outperformed the FTSE 100 by a considerable margin. 5 of these 9 stocks now have charts that have turned bearish, so I have recommended the sale of these (Admiral, Croda International, Halma, JD Sports Fashion, Spirax-Sarco Engineering). In addition, one other stock, Antofagasta went from bullish to bearish (falling below the key level identified in the May 2021 recommendation) and recently turned bullish again. It is a copper mining company based in Chile, and 60% of the stock is held by the Luksic family. This limits the liquidity in the stock, leading to large swings in price on big buy and sell orders, as there are less shares available for trading compared to similarly sized companies. Therefore, I have recommended that it be sold.

That leaves three stocks from the original recommendations listed in May 2021, that continue to have bullish charts, and have therefore remained resilient throughout the market upheaval - caused by Putin's invasion of the Ukraine, and also of course, caused by the threat of rising inflation and rising interest rates.

These three resilient stocks are 3i Group, Segro and Intercontinental Hotel Group. All three continue to have bullish charts, despite the change in the overall market trend from bullish to bearish.

Which stocks in the FTSE 100 should replace these 6 in the new recommendations?

The technical review recently completed, identified a total of 10 stocks that have very bullish charts. Following a review of the fundamentals, I have whittled that list down to the following three stocks:-

1. Anglo American £33.24 (mining)

2. Auto Trader £6.28 (on-line car advertising)

3. SSE £18.50 (utility)

The mining sector of the London market was out of favour, due to the growing trend of 'ESG' (Environmental, Social & Governance) investing. Mining shares were given a 'cold shoulder' as these were considered environmentally unfriendly. All of that changed dramatically on Putin's invasion of Ukraine, forcing investors to focus on the critical raw materials required for the basic functioning of day to day life in both the developed and developing world.

Consequently, all of the mining stocks are suddenly back in favour, and most have very bullish charts. The valuations still remain low, due to the prior period of neglect by investors. Anglo American is the preferred stock as it has largely avoided the environmental mishaps of its peers. The recent shake out in the sector, due to poor first quarter production figures (mostly arising from labour shortages due to covid), provides a buying opportunity. This fall brings the shares back to the 150 day simple moving average, and to the previous high of 2021, both of which should act as support levels around £33.

In fundamental terms the stock looks exceedingly cheap with a P/E (based on earnings for the trailing twelve month period) of only 6 times (source: yahoo finance and ycharts), and a forecast dividend yield for 2022 of 4.7%, with good dividend cover of 2.4 times (source: AJ Bell).

The on-line car sales advertising website, Autotrader, commands a valuation that, at first glance, seems somewhat overstretched. The P/E (based on earnings for the trailing twelve months) is 31, and the dividend yield is a modest 1.24%, per yahoo finance.

However, the financial year for this company ends on 31st March, with interim results for the 6 months ending 30th September. Therefore the 'trailing twelve months' in this case is the 12 months ended 30th September 2021. That includes the months of December 2020 and June 2021, when the company allowed its important car dealer clients, a free and a discounted month of advertising respectively. It had previously given them two free months at the outset of the Covid crisis, in April and May 2020.

The historic results are therefore misleading, due to these once off discounts. Analysts are forecasting a forward P/E of 24, implying an increase in earnings per share of over 30% from these artificially depressed levels. In light of this, the P/E is high, but not too high, in my opinion, for a company with such huge pricing power. The net profit margin is a whopping 54%. This a common benefit of operating on-line, as the cost of maintaining a physical location in high cost city centre areas is avoided.

This company dominates the on-line car advertising market in the UK, and supplies a service that the motor dealers cannot do without. That gives it enormous pricing power. In addition, it is attempting to tempt more segments of the motor business on-line, by offering a guaranteed minimum trade-in value, and on recently acquiring a van leasing business. Full year results are due around the end of May.

The increase in investor interest in utility stocks such as SSE, as evidenced by the strong chart, is perhaps no surprise, due to its defensive qualities. The prospect of a long war in Ukraine, allied to rising inflation and rising interest rates, all mean that there is a considerable risk that we are now at the beginning of a bear market for equities. There is a hardly a more basic commodity than electricity, in terms of it being an essential cost that consumers must pay, even if their incomes decline sharply.

SSE has a modest P/E of 7.47 (based on trailing twelve month earnings) and a dividend yield of 4.5% (source: yahoo finance). It is rated highly in terms of corporate governance, and it has built up a significant business in renewable energy, particularly in wind energy.

A recent report in the left leaning newspaper The Guardian said that the UK government will find it hard to bully SSE into reducing prices (or limiting price increases) due its investment in renewable energy. SSE repeatedly refers to itself as the "UK's clean energy champion" so it should be well positioned to see off the woke mob, and also politicians seeking short term popularity at the expense of viable longer term solutions!

The seven stocks that have very bullish charts, but did not 'make the cut' following my review of the fundamentals are listed below, together with some comment. I would avoid these for now, but they may be worth revisiting if the technical indicators remain strong on the next detailed review:-

Antofagasta, BHP, Glencore - these mining stocks were rejected in favour of Anglo American, and I did not want to have more than one mining stock in the recommended list until such time as the upward trend in this sector appears to be more durable.

Astra Zeneca - this stock has risen sharply on optimism surrounding a new drug, currently in phase 3 trials, for liver cancer. The US Food & Drug Authority are due to review it in the final quarter of 2022. Buying into such optimism is usually dangerous as expectations are often overly optimistic.

BAE Systems - driven up by the invasion of Ukraine on 24th February 2022, on expectation of higher sales of arms. Such stocks are often marked up aggressively by market-makers on unexpected news, and fall back when the initial surprise/shock begins to fade away.

Bunzl - looks like a good defensive stock as it is a major supplier to supermarkets and wholesalers of paper and plastic packaging. Also, in the recent results, the accompanying statement said that "inflation is strongly supportive to growth". All of that is positive, but ultimately I was put off by some fairly heavy selling of the stock by directors recently.

United Utilities - poor profitability levels and more vulnerable to political pressure to curtail pricing than fellow utility SSE which has an equally bullish chart.