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BEST FTSE 100 STOCKS TO BUY?

9th November 2020

The following stocks in the FTSE 100 index had the most bullish charts as per the review done on this website in late Oct/early Nov 2020. Hereunder is a fundamental analysis of each of these stocks.

1. ANTOFAGASTA

Share price: £10.98

P/E: 31

Dividend yield: 1% (forecast)

Epic code: ANTO

Antofagasta owns four copper mines in Chile, and the shares are listed on the London Stock Exchange. The company is ultimately controlled by the Luksic family, through their investment vehicle, Metalinvest, and another two related companies, which together hold 66% of the shares.

This company is unlikely to feature in the portfolio of any fund with a mandate to invest in stocks with a high ESG rating. This acronym stands for 'Environment, Social & Governance' and there is a growing level of interest from investors in putting their funds only into the stocks of companies that have a good rating for all three criteria.

Antofagasta fails miserably on all three counts. Firstly, any type of mining is bad for the environment. Secondly, mining is dangerous and can lead to injuries and, tragically, fatalities so the social impact is often very negative. Thirdly, the Luksic family have almost total control of the company, so this gives it a very poor corporate governance rating.

Copper is known as 'the red metal' and its price has often been extremely volatile. The price fell during the past few years, and dropped even further during the early months of the covid crisis. However, it has since rebounded quite sharply and is currently trading at around $6,600 per metric ton on the London Metal Exchange. At the $7,000 level, miners typically start digging for more copper, as profit margins are very attractive at that level.

China accounts for approximately 50% of the demand for copper, and the Chinese economy appears to be rapidly recovering - China being the first country in, and subsequently out, of the covid crisis. However, the other more interesting factor, is that a lot of copper components are used in electric vehicles (or 'EVs').

This high copper usage in EVs, and the likelihood of a greater number of these being on the road in the coming years, should drive the copper price further upwards, to Antofagasta's benefit.

So while governments everywhere are pushing motorists into trading in their petrol or diesel car for a new EV, the irony here is that the demand for more copper will lead to a huge upsurge in the environmentally unfriendly business of copper mining!

This is confirmed by the Chairman's statement in the 2019 annual report that "the demand for copper will grow as part of the greening of global power and transport systems...".

The financials look healthy - the balance sheet is very strong, net cash (including short term investments) of £2.2 billion versus total debt of £2.5 billion, as at 31 December 2019. Earnings per share have been very volatile: 16p in 2016, 76p in 2017 (so high was the price that year - copper was being stripped from various installations by thieves..), 55p in 2018, 51p in 2019. However, the cash flow, while volatile, has been strong enough to comfortably exceed the capital investment made each year. The P/E of 31 (based on trailing twelve months earnings per share) indicates that investors are expecting a jump in earnings next year, but is not too demanding given the company's leverage to the copper price, with a strong balance sheet providing a safety net if expectations prove to be too optimistic.

Finally, as regards corporate governance, the Luksic family acquired their controlling stake in 1980. If they were of the mind-set necessary to abuse their dominant position by stripping assets out of the company, they would probably have done so long before now. Instead, their interests would appear to be aligned with those of the minority shareholders, in growing the business over the long term. They have also shown themselves to be capable of managing the various risks inherent in the business - the volatility of the copper price, the vagaries of the Chilean peso, a heavily unionised labour force that is often threatening strikes and high health and safety costs.

The ESG funds will continue to pile into the high profile EV maker, Tesla, adding to its already stratospheric valuation in 2021, but with a huge risk of earnings falling short of the level required. However, a more profitable way of gaining exposure to EV growth could well be through the much more modestly rated, and unfashionable, Antofagasta.

2. CRODA INTERNATIONAL

Share price: £62.22

P/E: 41

Dividend yield: 1.22% (forecast)

Epic code: CRDA

Croda makes speciality chemicals which are used in huge variety of applications, and it has four divisions. These are Personal Care (eg self-tanning, skin care), Life Sciences (eg crop protection), Performance Technologies (eg dietary supplements) and Industrial Chemicals (eg paints & coatings, water treatment chemicals, additives for batteries).

The earnings have been static for the past three years, with earnings per share figures of £1.85 in 2017, £1.86 in 2018 and £1.73 in 2019. However, the shares have taken off this year despite this tepid performance. Furthermore, the debt level is quite high, so a takeover or any kind of reorganisation such as a spin off of a fast growing division, looks unlikely.

So why the sudden burst of strength in the share price? It may be that ESG funds (Environmental, Social & Governance) which are increasingly in vogue with investors, are buying this stock. A number of the products in which the company's chemicals are used, could experience higher demand due to the 'greening' of global power and transport systems.

3. EXPERIAN

Share price: £30.07

P/E: 42

Dividend yield: 1.2% (forecast)

Epic code: EXPN

Experian provides credit rating reports on individuals and businesses for its customers, who are mainly banks, landlords and retailers. It is one of the big three credit checking agencies. There is a major barrier to entry here, as these agencies have been in business for many years, and have built up a valuable database during that time. Furthermore, Experian appears to be recession resistant. The initial fall in the shares at the beginning of the covid crisis, was followed by a very strong recovery. It is likely that there was more credit checking, not less, during this time as its customers sought advance warning of any problems with their own clients. The inexorable move towards on-line commerce has also boosted demand for Experian's CrossCare platform which is used to combat identity fraud.

The company did have a major data breach about five years ago, but recovered from that setback. It is currently engaged in something of a stand off with the Information Commissioner's Office (ICO) in the UK. The ICO has forced Experian to modify its procedures for selling data on to outside parties. However, the ICO has not issued any fine, and an appeal has been lodged by Experian against the ICO's findings.

Given that the shares have performed so strongly recently, it is rather surprising to find that earnings have actually declined during the past few years. In 2017, the earnings per share was 92p, in 2018 89p, 2019 77p, and for the year ended 31 March 2020 the earnings per share was 75p. In addition, the level of debt has increased, and the number of shares in issue has decreased, indicating that share buybacks have taken place.

The high P/E of 42 therefore indicates that investors are expecting an upsurge in demand for the company's services. Identity fraud prevention is essential for on-line businesses taking on new clients, and increased credit checking will continue to feature as long as this pandemic drags on.

4. HALMA

Share price: £24.93

P/E: 49

Dividend yield: 0.79% (forecast)

Epic code: HLMA

Halma makes health and safety products. This includes products for monitoring air pollution, and improving food and water quality.

The earnings per share (eps) growth for the past few years has been very impressive. In the year ended 31st March 2017, the eps was 34p. In 2018, it increased to 41p (+20%). In 2019, 45p (+10%) and in 2020, 52p (+16%). The cash flow statements confirm that there is a corresponding increase in the surplus cash generated every year. Profit margins are a healthy 13% to 14% of turnover each year.

A further impressive feature is that most of the earnings growth is organic. Some acquisitions have been made (£233 million in 2020 & £122 million in 2018) but these would not have had a huge impact on a group with a market capitalisation of £10 billion.

Halma has set itself a target of doubling its earnings per share every five years. It is coming quite close to achieving this ambitious goal. That would just about justify the very high P/E of 49 (based on trailing twelve months earnings). Quality stocks rarely come cheap.

5. INTERTEK GROUP

Share price: £58.40

P/E: 36

Dividend yield: 1.82% (forecast)

Epic code: ITRK

Intertek provides testing, inspection, sustainability analysis, second-party supplier auditing and certification. It has customers in a wide variety of industries, including oil & gas, mining, textiles, consumer electronics, pharmaceuticals and building products.

The earnings per share growth is reasonably good. In year ended 31st December 2016, it made £1.58 per share. In 2017, £1.79 (+13%). In 2018, £1.77 (-1%). In 2019, £1.95 (+10%). There was a corresponding growth in cash flow in the same periods. The profit margin is around 10%, and the gearing ratio is just under 50% which is around the normal level for most industry sectors.

Most of the growth is organic, as the only significant acquisition was made in 2018 for £387 million and this would not have had a major impact given that the market capitalisation is £9.4 billion.

The question therefore is - does it justify the high P/E of 36 times earnings (based on trailing twelve months earnings)? Again, the answer is - just about. It looks like the ESG (Environmental, Social & Governance) focused funds could have pushed up the price of this stock, as it would fit that criteria.

6. POLYMETAL INTERNATIONAL

Share price: £16.59

P/E: 11

Dividend yield: 3.28% (forecast)

Epic code: POLY

Polymetal is a precious metal miner that has mines in Russia, Kazakhstan, East Asia & Europe. It mines gold, silver, copper, zinc and platinum.

It is headquartered in St Petersburg, Russia and has a good corporate governance rating by International Shareholder Services (unusual for a Russian company!) of Audit 1, Board 1, Shareholder Rights 1 & Director Compensation 4.

The earnings are very sensitive to metal prices, and the gold price in particular. Investment in gold, and in gold mining companies is in vogue amongst investors who are concerned about the lack of fiscal discipline by governments worldwide, as they spend their way out of the covid crisis with great abandon.

How will these enormous debt be paid (in addition to the debt clocked up in rescuing bank depositors during the 07/08 crash)? The answer, it would appear, is by inflating their way out of these huge debts.

As the interest cost of these huge debts has been driven down to zero, or near zero, due to intervention in the bond markets by the Federal Reserve and the European Central Bank, a modest rate of inflation together with some economic growth every year, will achieve this. If you are paying near zero interest on your debt, and you have an inflation rate of say 2% and economic growth of say 3% per annum, then in about twenty years time, that debt will still be the same but the size of the economy will be much larger and the purchasing power of money will be much lower. Therefore that debt will be a much lower multiple of gross domestic product than it is today.

If you are confused by this, then let me explain it in another way. Let's go back fifty years to 1970. Back then, you could have bought a modest terraced house in a country village for IR£1,000 (€1,270). Today, that same house would cost you around €250,000. That is a multiple of nearly 200 times. Yes it has gone up in value - from about three times average annual income, to over five times average annual income, But the main reason for the huge multiple is that the value of money has collapsed in that fifty year period.

Why has the value of money collapsed? Due to inflation. And why is inflation so prevalent? Because governments almost always overspend. The resulting deficit is funded by issuing government bonds. The government only pays the interest rate on these bonds, until the redemption date. If the annual rate of inflation and economic growth is more than the interest rate on these bonds, then the government can finance ever larger deficits for as long as it wants.

However, if investors get the jitters at some stage in the future, about buying very low interest government bonds issued by countries with enormous debts, then the whole scheme could collapse like a deck of cards.

The weakest link in the chain is probably the UK. The Bank of England would have much less firepower in intervening in the bond market, if there was a crisis in investor confidence, than the European Central Bank or the Federal Reserve. The last time that central banks were intervening in the market was to keep their respective currencies within certain levels dictated by the Exchange Rate Mechanism (ERM). It all fell apart when sterling crashed out of the ERM in 1992.

A similar crisis could occur again, due to the huge ballooning of government debt. As Mark Twain is reputed to have said; 'history may not repeat itself, but it often rhymes'.

Gold would be a safe haven in such a crisis, and would appreciate sharply in value, is the thinking behind the current vogue for gold, and gold related investments. It may well be prudent to have 5% to 10% of your share portfolio in such investments, and Polymetal shares are likely to feature prominently amongst investors seeking to protect their portfolios in the event of the next market crash resembling something like the above scenario.

7. SEGRO

Share price: £9.05

P/E: 15

Dividend yield: 2.24% (forecast)

Epic code: SGRO

Segro is a UK Real Estate Investment Trust (REIT) that owns warehouses and light industrial property. It has continued to expand throughout the UK and Continental Europe, as demand for more warehousing space is being driven by the on-line retailers.

It has raised funds by means of a placing or rights issue in 2016, 2017 and 2020 from investors as it continues to expand its property portfolio. The net asset value (nav) per share as at 31st December 2019 was £7. The shares are trading at a premium of 29% to this nav figure, and this indicates that investors expect the company's growth to continue for the foreseeable future.

The earnings per share figures for the past few years, include an annual surplus on revaluing the entire property portfolio which distorts the results for comparative purposes. The adjusted earnings per share figures, calculated in accordance with the European Public Real Estate (EPRA) standards, is a better indicator. This shows reasonably steady growth during the past few years, as follows:- 2015 17.6p, 2016 18.8p (+7%), 2017 19.9p (+6%), 2018 23.4p (+18%), 2019 24.4p (+4%).

Segro shares may be a much less risky way of gaining exposure to the growth of on-line retailing, than buying some of the very highly rated stocks in that sector.

Has on-line retailing peaked, due to the pandemic? Or will it continue to grow until every retailer on the high street closes down? The answer probably lies somewhere between these two extremes, so the Segro growth story should have further to run.

8. SPIRAX SARCO ENGINEERING

Share price: £116.30

P/E: 51

Dividend yield: 0.94% (forecast)

Epic code: SPX

Spirax Sarco Engineering makes steam systems, electrical heating, pumps, tubing and various component technologies. It has a wide variety of clients, including those in the food & drink, pharmaceutical, oil & gas and semi conductors sectors. It has grown largely by acquisitions, and focuses on improving the direct sales models of the businesses acquired.

Earnings per share growth (eps) adjusted to exclude amortisation of goodwill on acquisitions and gains or looses on sales of subsidiaries has slowed in recent years. In 2016 adjusted eps was 171.5p. In 2017 220.5p (+29%). In 2018 250p (+13%). In 2019 265.7p (+6%).

The P/E appears to be very high, in light of the slowdown of growth in 2019. In addition, the problem with companies that grow by acquisition, is that if they are overpaying for same, then it usually only become apparent when it is too late.

9. INTERCONTINENTAL HOTELS GROUP

Share price: £46.81

P/E: Not meaningful (183 times the negligible earnings expected for 2020)

Dividend yield: Cancelled

Epic code: IHG

IHG has approximately 5,900 hotels in 100 countries. It only owns a small number of these hotels, as the majority operate as franchises. This means that IHG does not own or operate the hotel. IHG provides the branding (eg Holiday Inn, Crown Plaza, Regent), the on-line booking system and centralised marketing. It charges the franchisee a fee for these services.

This business model means that IHG has very little capital expenditure, as it generally does not buy or build the hotel, and it has very little risk. If the economy takes a nosedive, as it did in 2020, and hotels close, IHG only lose the fee income - it does not incur any actual losses. Therefore, it is not as exposed to the covid crisis, which has decimated the travel industry, as much as one would expect.

That may be why it is one of the few stocks in the travel sector that has recently broken out of its downward trend, per the charts, before the uplift resulting from Pfizer's news of an effective vaccine for covid. Another possible reason is rumours of a takeover by the French hotel group, Accor - per an article in the Le Figaro newspaper in August. A good rule of thumb with regard to takeover rumours, is to disregard those relating to small companies with illiquid stocks. These are generally put out to get the public on the wrong side of the market, getting them to buy while an insider is gradually offloading stock ('where there's a tip, there's a tap!'). However, rumours concerning large companies such as IHG usually prove to be well founded.

A review of the fundamentals indicates why a suitor could be interested. IHG has built up a significant presence in China. Most of these hotels are owned and operated by IHG, but it intends to gradually transition to a franchise model. The earnings per share (eps) growth has been reasonably satisfactory. It reports in dollars and the eps adjusted to exclude exceptional items for the past few years was 303.3 cents in 2019 (+3%), 293.3 cents in 2018 (+21%), 243 cents in 2017. Converting the 2019 eps figure to sterling, gives a figure of £2.305, so that results in a P/E of 20 based on the current share price.

That seems a reasonable rating for a company that has little capital investment - the franchise being the party that incurs that outlay - and the shares could be a good entry point for investors seeking bargains in the decimated travel sector. Today's news from Pfizer has lead to a sharp mark up in these stocks, so wait a few days for that rally to fade before buying.

CONCLUSION: Antofagasta, Halma, Polymetal, Segro & IHG are the stocks with the best fundamentals, from the list above of FTSE 100 stocks with strong buy signals per the charts.