With a 30% share of the UK grocery market, investors could be forgiven for thinking that Tesco’s growth days are behind it. However, Tesco still has a strong long-term growth story to tell.

Domestically the forthcoming launch of Tesco Bank looks like a canny move to capitalise on the current distrust of UK banks and capitalise on its strong brand and store network.

Internationally Tesco offers significant exposure to emerging markets particularly in Asia which is forecast to grow to form 60% of the world’s GDP.

Despite this defensive-growth profile, an attractive combination in today’s uncertain economic environment that is unrivalled by its UK supermarket peers, it is the lowest rated trading on a PE ratio of 13.9x, compared with Sainsbury’s 15x and Morrison’s 16x.

With a well covered 3% dividend yield to boot that looks unwarranted and we believe the stock should form a core part of any investor’s shopping basket.


Following the large rise in the stock market over the last six months many markets are now pricing in a V shaped recovery, leaving little room for disappointment. Finding value has become a more difficult task. With international diversification increasingly important for the private investor, we have decided to look abroad for the next opportunity.

As far as value is concerned Japan has ticked all the right boxes with the Nikkei’s price to book value by far the cheapest of the world’s largest stock markets. With a sound banking system only marginally affected by the credit crunch, Japan’s companies are well positioned to fill the vacuum which has been created by deleveraging Western economies. On top of that, a change in government (the first in over 50 years) is making investors sit up and take notice. There are indeed previous examples where the promise of reform spurred international investors to overweight Japan. This proved to be a catalyst for a sustained rally.


Those struggling to find value after the recent rally should look no further than Vodafone, currently trading at 140p per share.

A huge British success story – its market capitalisation is more than £74bn – Vodafone operates across the world and indeed the majority of group profits are earned overseas. Strong contributions from emerging markets and Verizon Wireless in the US are driving revenues whilst the decline in the pound is an additional boost to the share price.

A discounted cash flow sum-of-the-parts price target comes out at approximately 170p, giving plenty of upward scope from current levels. A P/E ratio of 8.2x (and PEG ratio of 0.2) also suggest the shares are cheap.

Add to that a 5.5% dividend yield (covered 2.2 times) and management’s commitment to steadily increase its dividend and the stock is suited to both income seekers and growth investors alike.

BAE Systems

BAE Systems recent share price fall down towards its long term support level of 300p has presented a good buying opportunity for those investors not holding the stock. Much of the fall has been down to the pension scheme, which is in a large deficit. However, the “snapshot” measure required under IAS19 accounting standards exaggerates the volatility of what is a very, very long-term liability.

BAE Systems is currently trading on a December 2009 earnings multiple of 8.4x, a derisory discount to its peers.

With double-digit earnings growth, a dividend yield of 4.6% (covered 2.6 times) and good visibility of earnings, we feel the market is mispricing BAEs prospects.

For example, recent renewed commitment to the F35 Joint-Strike Fighter programme (half of which is built at BAE’s plant in Lancashire) could prove to be the most lucrative plane that BAE has helped to build.


Please find below some background information on one of our core holdings Scottish & Southern Energy, rated as a solid hold.

The UK’s second largest energy supplier is currently yielding close to 6% (which management aims to grow by 4% p.a.) and is trading on 10.4x earnings, a substantial discount to the sector (14.97x) and the wider market. Its commitment to renewables (SSE owns almost half of the UK’s total renewable generation capacity, including its largest wind farm) could also make it a future takeover target for one of the European utility giants.

The stock trades XD on Wednesday meaning that investors who buy the shares on this date will lose the right to receive the 46.2p final dividend payout. The stock will theoretically fall by this amount, however investors who buy it before this date will pocket the dividend.


GlaxoSmithKline have yesterday announced their half year results, reporting robust gross margins and strong revenue growth across the portfolio, particularly in vaccines.

GSK has taken 195m orders for its swine flu vaccine and is currently in talks with over 50 countries over stockpiling the drug.


Please find this month’s newsletter.


Halfords currently yields over 5% and is trading on 10x earnings (a 30% discount to the sector), thus offering potential capital gains as well as income. It is a counter-cyclical company which will benefit from cost-conscious consumers cycling to work, taking more UK holidays this year and car owners spending more money to keep their old cars on the road.


Please find this month’s newsletter.

Year ahead

Please find an article on the year ahead that was published in the Gibraltar Chronicle this month.