Today, we are recommending our clients to sell Smith & Nephew Plc and switch into Shire Plc.

Smith & Nephew Plc has performed well since we added the stock as a ‘special situation’ in our model portfolio. We are now advising our clients to take profits as though the business is in reasonable shape, we see limited near-term scope for either higher earnings expectations or for further capital deployment to drive the share price much higher. Technically, the stock is at all-time highs and fundamentally, the risks are now to the downside with the consensus broker price target coming in at 741p, 5% below current levels. Indeed, trading on a 15.6x forward P/E multiple, Smith & Nephew’s prospects are by and large already reflected in the share price.

Shire is a leading specialty pharmaceutical company, with a balanced portfolio of differentiated products focusing on life-altering conditions such as rare genetic diseases and behavioural health such as Attention Deficit Disorder and Depression.

A cheap valuation, both compared with its peers and its historical P/E multiple, indicates that the current share price represents a very attractive entry point to a long-term industry winner. Potential EPS upside in the form of clarity on legal challenges and positive developments in its pipeline could propel the stock further than expected, as indicated by Goldman Sachs’s optimistic 2675p price target (indicating 30% potential upside).

On top of that, Shire has been cited as a takeover target for many years. With improved clarity on the pipeline and the legal front, this scenario seems like a real possibility more than ever.

Today, we are recommending our clients to sell AstraZeneca (“Astra”) and switch into GlaxoSmithKline (“Glaxo”).

AstraZeneca has had a good run as late, rising from 2792p to its current 3024p share price in just two months (a 8.3% gain). Though we originally switched from Glaxo into Astra, this call has not performed as we would have liked. Poor sales in Europe, falling drug prices and a shift to lower-cost generics have not been kind to the company’s share price. With that, J.P.Morgan Cazenove has today reiterated its underweight position with a 2970p price target citing declining earnings for the remainder of the decade on the back of an insufficuient drugs pipeline.The dividend may also be at risk, with the company having recently halted its share buyback ptrogramme prompting talk of a possible “strategic” acquisition.

We are using the low price of Glaxo as an opportunity to buy back in. Though priced on a higher p/e multiple (11.8x vs. 7.9x) and yielding slightly less at 5.5% (vs. 6.1%), we feel its more stable earnings mean a more secure dividend. The company’s growing business in emerging markets and its large consumer healthcare operation are both doing well, both justifying the valuation premium and securing its dividend. The company is also countering the pressure on ‘white pill’ markets in developed economies by restructuring its manufacturing operations, which is forecast to generate £500m of savings by 2015, which comes on top of the £2.5bn of annual savings the company has already found over the last four years.

Most investment banks appear to be more positive on Glaxo than Astra with Deutsche Bank having a price target of 1450p vs. 3000p for Astra. Combined with a solid 5.5% dividend, rising to 5.8% next year, we rate the shares a core holding in everyone’s portfolio.

Our Halfords recommendation has not performed as we would have liked, with an initial innocent-looking warehouse distribution problem being followed by a series of profit warnings.

We are now recommending investors cut their losses following the tremendous 75% rise from the July low of 188p. This rally was driven principally by expectations of an Olympics boost, a better than anticipated Q2 update (retail sales benefitted from pent-up cycling demand caused by poor Q1 weather) and the positive appointment of new CEO Matt Davies, former Chief Executive of ‘Pets at Home’.

JPMorgan Cazenove believes that the appointment of Mr Davies is a strong positive, as his background is in large scale, service orientated retailing. They expect a strategic review of the business will include a substantial downsizing in the store portfolio and a pricing review, given the competitive nature of the online leisure industry. However, the initiatives that are necessary will obviously take time to implement and take effect.

In the meantime, expectations have moved higher and even flat gross margin guidance looks demanding. Fundamentally, the share price looks fully valued now trading on a forward P/E multiple of 12.5x and it has surpassed the price targets of most brokers (UBS=285p, HSBC=330p, Deutsche Bank=300p, Peel Hunt=280p etc).

Technically, the shares are overbought with the RSI above 80 level (an extremely overbought reading) and the shares are potentially at a ‘double-top’.

Given the stock’s outperformance in both relative (+50% vs. the sector over the last 3 months) and absolute terms (+75% since late July), the near term risk lies to the downside

With base rates remaining stubbornly at 0.5%, income seekers are finding it hard to generate the kind of income they have grown accustomed to in recent years. However, for those prepared to widen their income-seeking horizon, there are attractive opportunities.
A hybrid of an ordinary share and a bond, preference shares stand in front of (i.e. are preferred to) ordinary shares in the queue for cash when a company is wound up, but behind all forms of company debt. They are also preferred to ordinary shares for dividend payments; indeed, no ordinary dividend can be paid until all dividends due to preferred holders have been paid.
We are recommending to our clients the General Accident 8 7/8% Preference Shares. A wholly-owned subsidiary of Aviva Plc, they are cumulative, meaning if the dividend is not paid one year, it is rolled up to the next. Priced at 104.5 pence per share, the current yield is yield 8.5%. Please find attached further information along with our guide to the preference share market.