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3 September 2017

Bargain Blue Chips

So much for the summer lull. Over the past few weeks, markets have been spiced up by a multitude of UK companies issuing profits warnings leading to some impressive share price movements. Investors have enjoyed a wild ride, with ample opportunity for impressive share price returns. However, far from being a signal of tougher times, however, this could instead represent a potential buying opportunity for some of the largest UK companies.

While many in the industry suggest that the stock market is ‘overvalued’, it may in fact represent the perfect time to look at stocks that are trading significantly below their 2017 highs. Delving deeper into the causes and consequences of these share price movements, we ask if some of these sell-offs have been overdone and attempt to identify the stocks now trading at bargain prices that you should be looking at right now.

 

The overriding theme of the summer, stealing many headlines, has been profits warnings. No fewer than three FTSE 100 or 250 stocks issued one such warning in just a single week in August, with share price impacts ranging from WPP’s -11.5% to Provident Financial’s calamitous -75% one-day hit. Yet many of these have come about due to poor management, legacy issues or operational issues rather than just structural ones. Could some of these stocks offer attractive returns should management get their act together in the final third of 2017?

An entire sector that has struggled this summer has been the Banks. Heading into the start of the season, markets were seriously pricing in the potential for a Bank of England rate hike, either by end-2017 or the start of 2018, as inflation spiralled. The first BoE hike since 2007 would have helped to improve the Banks’ net interest margins on lending, however a marked slowdown in inflation has dashed hopes of an imminent hike. Consequently, the sector has been under pressure over the past month, with major players falling to multi-month and 2017 lows.

An ongoing theme for 2017 has been the effectiveness of the OPEC-led Crude Oil production cuts in order to lift prices from their sensational 2016 lows of $20. The producers, including Saudi Arabia and Russia, have been at odds with rising production from US shale producers. While global benchmarks have held around the $50 a barrel mark since July, the UK’s major Oil companies have been stuck in relative limbo as Brent and US crude trade within $5 ranges since the start of August. Could they be due a breakout when OPEC meets in September?

Meanwhile, events from across the Atlantic have been having a significant impact on UK stocks. The Trump administration’s failure to repeal Obamacare has hindered the Pharmaceutical sector, while the FDA stating that it may consult the public on reducing nicotine from future e-cigarettes saw the Tobacco sector receive a drumming. Many had hoped that the President’s stubbornness would have been able to force through the Republican-majority Congress to repeal his predecessor’s namesake – and drug price caps – to the benefit of the UK’s multinational Pharmas, but this has so far failed. Meanwhile, Tobacco stocks have yet to see their share prices recover. Could 2017’s final few months provide a change of fortunes for both of these embattled sectors?

 

Over the page, we reveal our top five favourite ‘bargain’ blue chip stocks - one from each of the categories mentioned above - and look at what events are on the horizon for each stock. Will any of these catch your eye?

Page: 01

Unfavourable Coverage

One of the blue-chip names that issued a late-August profits warning – and the largest by market cap – was  WPP (WPP). The international advertising giant saw a slowdown in sales due to reduced spending from consumer products clients. However, its place as an international market leader places it in good stead to capitalise on emerging global trends. With foreign markets now more accessible than ever for companies across the world, how can lesser known names gain an edge? Through advertising, of course. WPP shareholders will be hoping the company can subsequently cashes in. Could a late-year US dollar recovery be a further positive for bulls?

 

Banking on a Recovery

Barclays (BARC), which has maintained the largest presence of any UK name in the US after the financial crisis, has seen its share price fall to a 2017 low as a result of a disappointing earnings season for banks across the globe. However, while the UK banking sector remains under pressure following the Bank of England’s step back from a hawkish leap of faith, there could be some bright spots on the horizon for the bank.

After several disappointments, US Republicans will be looking to achieve at least one major congressional success before House elections in 2018. Now the healthcare bill has failed, many are hoping attention will turn to the finance sector, with Tax Reform or the repeal of the Volker rule – a ban on banks using their own money to trade – looking most likely to be pursued by the Trump administration. If they succeed, could Barclays prosper?

 

Refining Output

The FTSE 100’s Oilers, that together form the largest sector on the index, have been rangebound for the majority of 2017. BP (BP.) has seen its share price bounce from its channel floor and ceiling nine times. Yet this may be about to change. Could the clean-up after the devastating Hurricane Harvey, which shut a fifth of US Oil refineries, hamper US output, helping OPEC to make a meaningful dent in the global supply glut?

 

In Need of Medicine

Of all the UK Pharmaceuticals under pressure during the sector slowdown, Shire (SHP) has arguably suffered the most. Its share price has steadily fallen from September 2016 highs, which accelerated after US congress failed to repeal Obamacare and was capped off by the departure of its CFO in late-August. Shares have been languishing at 20-month lows, however hints of rising lows support from April 2014 lows could offer some respite for the embattled shares. Will the zero ‘sell’ ratings held by institutional brokers also help to inspire bulls?

 

Up in Smoke

Back in July, Imperial Brands (IMB) shares sunk alongside fellow Tobacco giant British American Tobacco after the US FDA stated it was beginning a consultation that could eventually lead to the reduction of nicotine in future cigarette products to non-addictive levels. While the notable share price sell-offs that occurred on the day – a 4.2% fall for IMB and 7% decline for BATS – were well off the session lows of -9.5% and -13.8% respectively, both stocks are yet to return to the previous session’s closing price. Will there instead be a protracted recovery?

 

On the following pages, we present charts, broker views and in-house technical analysis for each of these five stocks.

Page: 02

WPP (WPP)

Will shares rally back to highs of 1925p (+36%) or fall to 2015 lows of 1275p (-10%)?
  • WPP shares have fallen 22% year-to-date, including an 11% one-day fall in August
  • Will almost 2-year rising lows support help to end the downtrend?
  • Relative Strength Index (RSI) has recovered from oversold, while Stochastics have just breached
  • Only 10% of brokers expect the price to fall further, while the average target price is almost a 25% higher

 

Broker Consensus: 61% Buy, 32% Hold, 7% Sell

Bullish: Societe Generale, Buy, Target 2120p, +49% (24 Aug)

Average Target: 1762p, +24% (31 Aug)

Bearish: Investec, Hold, Target 1370p, -3.5% (24 Aug)

 

Pricing and consensus data sourced from Bloomberg on 31 August. Please contact us for a full, up to date rundown.

Page: 03

Barclays (BARC)

Will shares rally to Summer highs of 215p (+12%) or fall to 2016 lows of 175p (-8.6%)?
  • Barclays has been trading in a 6-month downtrend. Will positive US news lift shares back to the channel ceiling?
  • Stochastics remain stubbornly oversold, while RSI is yet to breach the key level
  • Momentum, a rate of change measurement, is well off its worst levels
  • The majority of brokers are positive on Barclays, with an average target price 15% higher than the current level

 

Broker Consensus: 50% Buy, 23% Hold, 27% Sell

Bullish: Societe Generale, Buy, Target 265p, +38% (3 Aug)

Average Target: 220p, +15% (31 Aug)

Bearish: Macquarie, Underperform, Target 180p, -6.0% (12 Jul)

 

Pricing and consensus data sourced from Bloomberg on 31 August. Please contact us for a full, up to date rundown.

Page: 04

BP (BP.)

Will shares rally to channel ceiling at 475p (+6.6%) or fall to lows of 432p (-3.0%)?
  • BP shares have traded in a tight range for most of 2017. Will they break out before the end of the year?
  • Stochastics have recovered sharply from oversold
  • Momentum has turned positive for the first time since mid-August
  • Brokers are neutral-to-positive on BP, with almost 85% expecting upside to the current price

 

Broker Consensus: 40% Buy, 47% Hold, 13% Sell

Bullish: Barclays, Overweight, Target 675p, +51% (21 Aug)

Average Target: 493p, +11% (31 Aug)

Bearish: Macquarie, Underperform, Target 400p, -10% (5 Aug)

 

Pricing and consensus data sourced from Bloomberg on 31 August. Please contact us for a full, up to date rundown.

Page: 05

Shire (SHP)

Will shares rally to 2016 highs of 5400p (+38%) or fall to 2014 lows of 2800p (-28%)?
  • Shire shares are rallying from shallow 3-year rising lows support. Will it extend to resistance?
  • Stochastics and RSI have both recovered sharply from oversold
  • Directional indicators have made a bullish cross
  • Brokers currently hold zero ‘sell’ ratings on Shire, while an impressive 95% see upside to the current price

 

Broker Consensus: 77% Buy, 23% Hold, 0% Sell

Bullish: Societe Generale, Buy, Target 7500p, +92% (14 Aug)

Average Target: 5466p, +40% (31 Aug)

Bearish: UBS, Neutral, Target 4095p, +4.9% (29 Aug)

 

Pricing and consensus data sourced from Bloomberg on 31 August. Please contact us for a full, up to date rundown.

Page: 06

Imperial Brands (IMB)

Will shares rally to July highs of 3950p (+8.4%) or fall to July lows of 3100p (-4.0%)?
  • Shares have made a slight recovery from 2017 lows, yet remain a distance from its highs
  • Will the rally from support result in a test of 12-month intersecting resistance?
  • Stochastics have recovered sharply from oversold while RSI approaches a bullish reading above 50
  • Incredibly, 100% of city brokers hold a target price above its current level

 

Broker Consensus: 74% Buy, 17% Hold, 9% Sell

Bullish: Whitman Howard, Buy, Target 5100p, +58% (2 Aug)

Average Target: 4115p, +27% (31 Aug)

Bearish: RBC Capital Markets, Outperform, Target 3600p, +11% (31 Aug)

 

Pricing and consensus data sourced from Bloomberg on 31 August. Please contact us for a full, up to date rundown.

Page: 07

The Accendo Markets Research Offering

Does your current broker’s morning report tell you all you need to know about yesterday’s news? If so, how is it offering you anything more than the plethora of information already available on the internet?

We’re proud that our morning editorial has become a hot commodity in the City, its content quoted daily by the journalists that are writing the news everyone else will be reading later in the day, if not the next. Our morning report tells you what’s driving the market at that moment and what to look out for in the day ahead.

If a company has reported earnings before the market opens, we’ll tell you why the shares are called to open up or down in relation to that announcement.

As well as the Morning Report, signing-up to Accendo Markets Research & Trade Ideas offers you the chance to receive the following publications:

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Based on a wealth of experience, gained from both large and small institutions, our Research and Trade Ideas are produced in-house. Our team of dedicated professionals comprises both analysts and traders, drawing upon a wide range of resources and methodologies.

Our aim is to provide you with the manpower and expertise you need to help you clarify, interpret and capitalise on the ever-growing volume of market information.

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Page: 08

Want to take advantage of the above opportunities right now?

Whether you see UK stocks going up or down for the remainder of the year, tradable opportunities will present themselves regularly. We’re here to help you weed them out and capitalise on them. Accendo Markets can help you increase your profit potential with the use of leveraged instruments such as CFDs, a flexible alternative to traditional shares that is currently exempt from UK stamp duty.

CFDs: Like shares, but more flexible

Stockbroking Ticket

CFD Ticket

The example above shows how buying 1,450 shares in British Land @ £6.90 requires an outlay of around £10,000 plus commission (see left-hand box), while the same exposure via a CFD requires about £500 plus commission (see right-hand box). If a trader invests in British Land, one would assume they believe the share price is likely to move in their favour. After considering the ‘worst case scenario’ and assigning funds to cover it, the trader may conclude there’s little point in exposing the full £10,000 to the BLND shares - some of that capital could be put to good use elsewhere in the markets. (Source: IG, Prices indicative)

CFDs are leveraged instruments, but you don’t have to use the leverage

If you had, say, £10,000 to invest in the stock market, you could deposit that amount into a share dealing account and purchase shares in a company. You would pay commission to open the position, 0.5% in stamp duty and the full £10,000 will be tied up in your chosen shares with any profit or loss based on that exposure. The same £10,000 worth of exposure can be secured with a CFD for a fraction of the initial outlay thanks to leverage, with the risk and reward the same as if £10,000 worth of traditional shares were held. But should you not be interested in leverage, you can always treat CFDs like shares. Simply deposit £10,000 into a CFD trading account and take the equivalent CFD position which will tie up just £500 (note that overnight financing costs will still apply). The remaining £9,500 is not tied up, so you can use some of that to take advantage of another short-term opportunity elsewhere, or simply leave it on the account to support any losses. Best of all, using a CFD means you pay no stamp duty!

What’s your view?

Think shares will rise? Take a long position by buying CFDs (buy low, aiming to sell high). Think they’ll fall? Take a short position by selling CFDs (sell high, aiming to buy low). For a more detailed rundown of CFDs, their mechanics, associated costs and some trading scenarios download our ‘Comprehensive Guide to CFDs’ here.

Page: 09

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Page: 10

Our research is produced by Accendo Markets Limited. Research produced and disseminated by Accendo Markets is classified as non-independent research, and is therefore a marketing communication. Accendo Markets research has not been prepared in accordance with legal requirements designed to promote its independence and may not comply with FCA guidelines to prevent conflicts of interest and is not subject to any prohibition on dealing ahead of the dissemination of research. As such, this research does not constitute a personal recommendation or offer to enter into a transaction, it is produced and distributed for information purposes only. Accendo Markets considers information contained within the research to be valid when published, and gives no warranty as to the investments referred to in this material. The income from the investments referred to may go down as well as up, and investors may realise losses on investments. The past performance of a particular investment is not necessarily a guide to its future performance. Prepared by Michael van Dulken, Head of Research

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