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Five stocks to watch in 2016

Joanna Faith
Written By:
Joanna Faith

Steve Clayton, head of equity research at Hargreaves Lansdown, chooses his five stocks to watch in 2016.

Healthy growth – EMIS Group plc (EMIS)

Effective communications between medical professionals is critical. EMIS is a healthcare technology company, founded in 1987 by two Yorkshire GPs who shared a vision of how computerising medical data could improve care. EMIS is now the UK market leader, providing software to manage surgeries, pharmacy management systems, retinal scanning and IT services to medical enterprises.

Market share is extremely strong and most of its revenues are recurring. Economies can blow hot or cold, but people will still get ill and healthcare providers will be seeking efficiencies regardless, so I think EMIS could be well placed for long-term growth.

EMIS is listed on the AIM market, valued at around £675m. It has grown profits every year since it listed in 2010, accompanied by rising dividends.

Strong ARM – ARM Holdings plc (ARM)

Smartphones pack vast computing power into tiny packages, but their big limitation is battery capacity. Computers were powered by the mains, so frugality of power usage was not a priority. ARM Holdings saw an opportunity and seized it. They design the processor circuitry for silicon chips and license the designs to manufacturers, who pay a royalty for each chip they make. Low power usage has won ARM an 85% market share for mobile microprocessors, and its designs are increasingly used elsewhere too.

Growth has impressed. Revenues are up thirty-fold since 1997 and twelve billion royalty-earning ARM-based chips were shipped in 2014. Volumes have compounded at 20% in recent years, and strong license sales promise further growth in royalties ahead. Because it sells designs, ARM has no need for factories, meaning high margins and strong cash flow.

Plenty of shares trade on lower ratings, but ARM has a unique market position in some of the world’s key technology growth hotspots.

Box clever – Tritax Big Box REIT plc (BBOX)

Tritax Big Box specialises in those big, boxy distribution centres that are springing up around our major roads. They’re in demand for cost effective distribution for retailers, and crucially, also for housing e-commerce operations.

Clients range from logistics companies to major retailers, including M&S. Tritax only invests when they have a committed tenant and a lease with upward-only rent reviews. Their assets are in demand and rental yields are 5% upwards. Debts are well controlled, with the loan-to value ratio below 40%.

Tritax has the combination of in-demand assets, upwards-only rent reviews and a strong balance sheet. The stock yields 4.7% (variable and not guaranteed), and new asset acquisitions should enhance earnings, meaning the prospects for dividend growth look good.

Floating freely – Lloyds Banking Group plc (LLOY)

The Treasury has announced that it plans a retail offer of Lloyds Banking Group shares, likely in the spring. Lloyds is my favourite UK bank; it is lean, simple and committed to a generous distribution policy. My view is that banks should be dull, dependable dividend payers – not swashbuckling adventurers. The bank comfortably passed the latest Bank of England stress tests, showing how far it has moved on.

The integration of HBOS has allowed huge cost cuts, leaving Lloyds easily the best-placed UK bank to generate free cash, because its cost: income ratio is far below peers. Lloyds is already generating a return on required equity of over 15%, far above the cost of capital. Market-leading cost-efficiency, strong cash and capital generation derived from leadership in core categories like mortgages and current accounts all bode well for future dividends.

That looks attractive to me, and there is likely to be strong demand for the offer, if and when it is announced.

Premier league – Whitbread plc (WTB)

Following the sale of its breweries in 2001, Whitbread has two core growth businesses, Premier Inn and Costa Coffee, as well as restaurant brands like Beefeater. Since 2008 it has almost tripled operating profits, by organically rolling out the group’s brands into new locations at home and abroad.

Premier Inn is the market leader in UK hotels with a clear, consistent product offering comfort at a no-nonsense price. Whitbread plans to add around 5,000 rooms p.a. to Premier Inn, with a pipeline that offers visible growth years into the future.

Costa has delivered strong growth over many years. It now has twice as many UK stores as Starbucks and plans to grow sales by three quarters between now and 2020. Restaurants look to be Whitbread’s weakest link, and I suspect investors would cheer if the group were to dispose of them.

Whitbread’s plans suggest a lot of growth, for some time to come, yet the stock has been knocked off its highs, not least by market chatter that we will all stay in strangers’ spare rooms booked via Airbnb in future. Which we won’t. In summary Whitbread looks to offer predictable growth, with a good track record, though as with all investments there are no guarantees.