Analysis: Which European stocks are worth considering?
By Rob Griffin
08:00, 4 October 2021
Liberum, the independent investment bank, has revealed its most- and least-preferred European stock ideas in the wake of Covid-19 lockdowns.
The updated quarterly lists, which are mainly focused on the FTSE 350 and STOXX 600 indices, have been driven by analysts’ preferences.
In a report sent to Capital.com, Joe Brent, head of research aat Liberum, said the names had been chosen from more than 300 stocks analysed by the company. “Our goal in research is simple: to produce well-considered and thought-provoking ideas that help our clients to make money,” he explained.
Most preferred
The companies among Liberum analysts’ most preferred ideas hail from a wide range of sectors, according to the study. They include housebuilder Persimmon; engineering company Trifast; homeware brand made.com; healthcare company Medica Group; and Loungers, the leisure business.
The also include design agency M&C Saatchi; mining firm Glencore; Land Securities, the real estate firm; Costain Group, which provides support services; Electrocomponents, the industrial solutions company; digital marketplace Auto Trader; and courier company DX Group.
Least preferred
The companies that are among Liberum analysts’ least preferred stock ideas also come from a broad cross-section of sectors.
These include Grafton Group, the building materials business; winemaker Naked Wines; Dechra Pharmaceuticals; pub chain JD Wetherspoon; and mining giant Rio Tinto.
Also on the list were Hammerson, the real estate firm; support services Renew Holdings and Hays; and Air France.
A detailed look
Below we take a closer look at some of above most and least preferred names highlighted by Liberum’s equity research analysts.
Persimmon
Liberum analyst Charlie Campbell is finding good value across the housebuilding sector, with the market appearing to be “overly concerned” about the impact of input costs, rates and government policy.
“Persimmon is our preferred large-cap builder for the strength of its balance sheet and leading exposure to northern housing markets and first-time buyers,” he said.
Trifast
The engineering firm’s full-year 2023 earnings could be 30% above consensus, according to analyst Christian Hinderaker, who pointed out the market is focused on short-term inflationary pressures.
“We see margins of more than 10% medium term, with improved profitability and balance sheet set to support an M&A [mergers and acquisitions] strategy not yet recognised by the market,” he said.
Made.com
The homeware brand is disrupting a £94bn ($127.5bn, €109.8bn) market, which is at a “tipping point” of online adoption, according to analyst Wayne Brown.
“Its offer of design-led, curated and exclusive products at affordable prices differentiates it from the wide market characterised by commoditised cheap products at one end and expensive designer ones at the other,” he said.
Medica Group
Analyst Alistair Campbell believes structural shortages in NHS capacity create a unique growth opportunity for this provider of teleradiology services.
“The company is building a flexible international network of radiologists to meet this demand,” he said. “Medica’s out-of-hours service [NightHawk] is growing at a double-digit rate.”
Loungers
The success of the company’s flexible, all-day café-bar concept has come to the fore post-pandemic, according to analyst Anna Barnfather.
“Ongoing innovation and investment will drive further like-for-like outperformance and protect margins in the face of a challenging cost environment,” she said.
Grafton Group
Analyst Charlie Campbell admires the multiple achieved for selling its traditional GB merchanting business, but remains relatively cautious on the shares.
“The shares are likely to be driven by how well the GB merchanting [business] proceeds [£520m] are reinvested and how quickly,” he said.
Naked Wines
The winemaker has a unique business model, but the high customer acquisition costs and heavy discounting on first orders limit its ability to grow profitably, according to analyst Wayne Brown.
“We believe either retention rates need to increase and/or CAC [customer acquisition cost] needs to fall for the growth-profit dilemma to be resolved long term and for us to see any upside, but Naked’s track record fails to reassure us,” he said.
Dechra Pharmaceuticals
Analyst Alistair Campbell believes the company’s 2021 results showed continued strength in the companion animal segment, with Covid having had a positive impact on pet ownership.
“However, we question its sustainability, with Dechra flagging after a softening of vet visits in the US in recent weeks,” he said.
JD Wetherspoon
The pub chain’s high-volume/low-margin model will remain under pressure as the shape of the Covid recovery begins to play out, according to analyst Anna Barnfather.
“As such, we expect trading to continue to lag the market given its large sites, high street locations and reliance on vertical drinking [the practice of standing up at a crowded pub or bar], while industry-wide cost pressures also bite,” she said.
Rio Tinto
The mining company looks very cheap on spot commodity prices, but analyst Ben Davis believes the stock is a value trap.
“We believe the iron ore price has further to fall and will drag the shares down with it,” he said. “The shares will be increasingly sensitive to iron ore price as it reaches consensus long-run expectations that have been anchoring higher.”
Read more: Five stocks to watch in September: big volumes, strong fundamentals
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