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GAM 2016 Outlook – 5 Underdog Stocks to Watch

Friday, December 11, 2015

bayer

Bayer

Oliver Maslowski Portfolio Manager, European equities

One high conviction stock for 2016 is Bayer. The company underperformed the DAX and its peer group year-to-date as investors remain sceptical regarding the potential of its pharmaceutical product sales and its crop protection exposure, given the slump in commodity prices and its difficult chemicals division IPO (Covestro). Strong third-quarter results, solid earnings growth, a 10% valuation discount to EU pharma peers and modest market expectations are a good setting for potential outperformance in 2016.

Easyjet Image Square

EasyJet

Gianmarco Mondani Investment Director, non-directional equity team

The stock has underperformed the market on fear that low oil prices and growing capacity will mean greater competition and erode its margins. It trades relatively cheaply on 10 times forward earnings and has solid margins, strong balance sheet and plenty of opportunity (like Ryanair) to gain more market share and beat consensus expectations.

Intel Square

Intel

Mark Hawtin Investment Director, technology strategies

We think 2016 is a good time to look at Intel again. The company has suffered in the past with the ‘leaky bucket’ of declining PC sales, however, there are signs that this will slow in 2016 or may even flatten out. One of the core themes of its recent analyst day was that growth in the Data Centre Group (cloud) and internet of things/mobility business will compensate for the slowing PC business. With relatively cheap valuation levels (14x) and a dividend yield of almost 3%, it is easy to see how Intel, like Microsoft, can become part of the basket of investments to hold for the developing cloud story.

Pearson Square

Pearson

John Lambert Investment Director, global and UK equity strategies

Pearson sold off significantly during the final quarter of 2015, following company comments that the second half of the year would be weaker than expected. While this was disappointing, we believe there is still a strong case to be made that Pearson is a global leader in education technology, and that recent poor performance can and will be rectified. The role of technology in education will continue to rise, and so long as educational outcomes in many developed markets remain below expectations (notably the US), then demand for Pearson’s core offering should remain structurally intact. With further investment and some strategic repositioning, the company can begin to grow again and as a result regain a higher valuation multiple. Recent disposals have been very timely in this regard, with the company selling the FT Group and also its stake in the Economist and, on a proforma basis, thus eliminating most of its net debt. The stock looks particularly cheap in comparison with its own history, and expectations remain very low. To contrarian value investors, the stock looks very interesting at these levels.

Factory Square

SMC

Ernst Glanzmann Investment Manager and Head of the Japan equity strategies

SMC is a manufacturer of pneumatic equipment and actuators used for factory automation. The share price has underperformed in 2015 due to concerns over China and a slowdown in smartphone production/sales in 2015. However, 65% of SMC’s total sales are in developed countries, where the company has a steadily growing market share. In addition, the slowdown in China seems to be priced in to the share price, and the price should react on positive news, such as industry consolidation and more capacity reduction led by the government.

Bayer

Oliver Maslowski Portfolio Manager, European equities

Bayer

One high conviction stock for 2016 is Bayer. The company underperformed the DAX and its peer group year-to-date as investors remain sceptical regarding the potential of its pharmaceutical product sales and its crop protection exposure, given the slump in commodity prices and its difficult chemicals division IPO (Covestro). Strong third-quarter results, solid earnings growth, a 10% valuation discount to EU pharma peers and modest market expectations are a good setting for potential outperformance in 2016.

EasyJet

Gianmarco Mondani Investment Director, non-directional equity team

Easyjet Image Square

The stock has underperformed the market on fear that low oil prices and growing capacity will mean greater competition and erode its margins. It trades relatively cheaply on 10 times forward earnings and has solid margins, strong balance sheet and plenty of opportunity (like Ryanair) to gain more market share and beat consensus expectations.

Intel

Mark Hawtin Investment Director, technology strategies

Intel Square

We think 2016 is a good time to look at Intel again. The company has suffered in the past with the ‘leaky bucket’ of declining PC sales, however, there are signs that this will slow in 2016 or may even flatten out. One of the core themes of its recent analyst day was that growth in the Data Centre Group (cloud) and internet of things/mobility business will compensate for the slowing PC business. With relatively cheap valuation levels (14x) and a dividend yield of almost 3%, it is easy to see how Intel, like Microsoft, can become part of the basket of investments to hold for the developing cloud story.

Pearson

John Lambert Investment Director, global and UK equity strategies

Pearson Square

Pearson sold off significantly during the final quarter of 2015, following company comments that the second half of the year would be weaker than expected. While this was disappointing, we believe there is still a strong case to be made that Pearson is a global leader in education technology, and that recent poor performance can and will be rectified. The role of technology in education will continue to rise, and so long as educational outcomes in many developed markets remain below expectations (notably the US), then demand for Pearson’s core offering should remain structurally intact. With further investment and some strategic repositioning, the company can begin to grow again and as a result regain a higher valuation multiple. Recent disposals have been very timely in this regard, with the company selling the FT Group and also its stake in the Economist and, on a proforma basis, thus eliminating most of its net debt. The stock looks particularly cheap in comparison with its own history, and expectations remain very low. To contrarian value investors, the stock looks very interesting at these levels.

SMC

Ernst Glanzmann Investment Manager and Head of the Japan equity strategies

Factory Square

SMC is a manufacturer of pneumatic equipment and actuators used for factory automation. The share price has underperformed in 2015 due to concerns over China and a slowdown in smartphone production/sales in 2015. However, 65% of SMC’s total sales are in developed countries, where the company has a steadily growing market share. In addition, the slowdown in China seems to be priced in to the share price, and the price should react on positive news, such as industry consolidation and more capacity reduction led by the government.



Nothing contained herein constitutes investment, legal, accounting or tax advice and should not be construed as a solicitation, offer or recommendation to acquire or dispose of any investment or to engage in any other transaction. The statements and opinions are those of the author at the time of publication and may not reflect his/her views thereafter. Reference to a security is not a recommendation to buy or sell that security.  The companies included are not necessarily held by any portfolio. Past performance is not indicative of future performance. No liability shall be accepted for the accuracy and completeness of the information.
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