5 Shares For 5 Years

Published in Investing on 17 January 2012

We pick five shares that should come out of the recession strongly.

During economic downturns, the sensible investment opinion turns to defensive shares with good dividends, and you've heard plenty of Fools going on about Tesco (LSE: TSCO), Vodafone (LSE: VOD) and the like.

But what about those companies that can handle cyclical swings just fine, and are capable of coming out strongly in the next upswing? Here are five that I think fit the bill and will be well ahead in another five years' time.

Outsourcing

MITIE Group (LSE: MTO) is one I've liked for a while, having last written about the company in May on the occasion of its annual results release. Since then, the share price has put on 20% to reach today's 267p, so why do I think they're still cheap?

In recent decades, we've seen something of a move to outsourcing, which makes a lot of sense -- why spend your resources doing your own catering, site management, security and so on when your expertise lies elsewhere, and there's an expert who can do it better and cheaper?

The shares are on a March 2012 P/E of 12 with a dividend yield of 3.6%, moving to 11 and 3.8% for 2013. Those dividends are very well covered. And the estimates for this year and next are assuming, almost certainly correctly, that we'll still be in tough times.

But if MITIE can keep profits growing right through these depths, with decent forecasts, how well will it do when things pick up? Very well, I reckon.

Mining

Mining shares have fallen out of favour of late, as the wheels have come off the commodities bandwagon on falling prices and fears of a Chinese slowdown.

So we're in a bit of a slump, and the fastest-growing economy on the planet has slowed down a bit. But demand for finite resources can only go up in the long term, and five years from now, prices of iron, copper, aluminium, coal and all those other minerals will be significantly higher, and so will the shares of the world's major miners -- well, that's my prediction, anyway.

So which one? I'm going to plump for Rio Tinto (LSE: RIO). Despite a recent upwards blip, its share price has fallen this year and lagged the FTSE by quite a bit, and on current forecasts it's looking cheap -- at a few pennies under £36, the shares are on a P/E of only 6.4. The dividend yield is low at 2%, but it's not a dividend pick, it's one where reinvesting profits in future development should bring better rewards.

We should have an operations update today, so we'll see how it goes.

Construction

The UK's housebuilders have had a tough time, but things surely can't get any worse now and we must be around the bottom, yes? In fact, only this week, Bovis Homes (LSE: BVS) told us it expects to report a significantly better 2011, and is upbeat about 2012.

But I'm not actually going for a housebuilder, I'm going to stick with the construction and regeneration specialist Morgan Sindall (LSE: MGNS), which I picked back in August. Since I rated it a 'buy now' share, the price has dipped further and then recovered, and is now around 5% up at 627p. All the reasons I liked the shares then -- low forward P/E, high dividend, no debt problems and great potential come the upturn -- are still there.

Aerospace

The aerospace and defence sector has been hit by defence cutbacks as the country headed into recession, and I think that has given us a great opportunity in BAE Systems (LSE: BA). Its share price lost around 50% from its end of 2007 peak, but has perked up a bit of late, which is a good sign, and I think it has a fair bit further to go over the next few years.

Forecasts for December 2011 indicate that the current price of 305p puts them on a P/E of only 7.5 with a dividend of 6%. And although earnings per share has been up and down a bit over the past few years, it's a well-managed cyclical business and the well-covered dividend has been growing at around 10% per year.

And there's very little debt. It's a company that's coming through the downturn just fine and should be well ahead in another five years.

Investment

Hedge funds are way off the popularity radar right now, and the UK's largest, Man Group (LSE: EMG), has seen its share price plummet -- it's lost 65% in the last 12 months alone. I've written about Man Group before, and only last week my colleague David Holding was waxing lyrical about it.

As David said, forecasts vary widely, so while for most companies they are to be treated with caution, here we should probably think of them as wild stabs in the dark.

But still, we're at a time when funds under management have fallen, and the tiered-fees approach is not working at its best. But when the economy picks up and investments in general start to do better, and more people have more cash to stick in hedge funds, that fee structure stands a pretty good chance of coming good.

Would you buy any of these five? Do let us know in the comments section, below.

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> The Motley Fool owns shares in MITIE Group and Tesco.

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Comments

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theRealGrinch 17 Jan 2012 , 12:50pm

Morgan Sindall - dont like the high intangibles. Vodafone, has attractions but the dividend aside the balance sheet isnt as strong as one might think. MAN, hate those accounts along with other banks, financials and insurance companies.

Rio Tinto and Bovis are of interest.

cornytiv34 17 Jan 2012 , 1:00pm

BAE has a very large pension deficit that cannot be ignored.

Hannibalis 17 Jan 2012 , 4:09pm

I'm holding both BA. and MGNS. I like both the yields and the stories. MAN scares me a little. The yields on the others are too low.

http://www.the-diy-income-investor.com/p/portfolio-uk-based.html

matthewy 18 Jan 2012 , 12:49pm

I'd be very cautious of Rio Tinto.

Resource companies PE ratios tend to be lowest at the top of their cycles which is differnt from other companies. Rio is also predominantly an iron ore comapny, and iron ore is at highs and very linked to China... tread carefully.

spudinvestor 18 Jan 2012 , 1:00pm

ining may well have been out of favour of late but it is diificult to ignore that but for the miners the FTSE would be substantially lower than it is now. Miners are to some extent discounting a soft landing in China and a gradual recovery in the US so as such the upside would seem somewhat limited over the next five years. MAN group has punished out of all proportion partly as shorting proxy for European financial shares which can still not be shorted. I would agree it is definately one to tuck away. What about Taylor Wimpey they have massively reduced dbet and have greatly improved margins enabling it to post a great trading update yesterday. It is obvious what self help has done here and once the recovery get underway here which it will TW's gearing to a pick up of the housing contruction sector will be phenomenal. What about the banks sute they are out of favour and the shorts have been battleling hard to keep the shares from rising yet this will likely prove a cvostly and "foolish" pursuit as year on year comparisons will begin to show an improving trend and Lloyds may even be out of the Govt's clutches this year or early nest.

I would be worried about Vodafone as it is little more than a utility facing regulatory cost pressures at home and abroad

swallowcres 18 Jan 2012 , 1:16pm

"A collapse in oil market price is imminent, and quite probably also a collapse in other commodity markets and even equity markets."

http://www.atimes.com/atimes/Global_Economy/MJ26Dj02.html

Broomtree54 18 Jan 2012 , 1:43pm

Sold MAN @ over £3 and have just come back in even a moderate re-rating could see it double and still be good value. Think Vodaphone has seen its best improvement for now but good divi.

I have always liked Mitie but never took the plunge as I have worked with them in certain areas and they did not impress at 'ground level' but maybe need to take another detached look.

BAE could end up on the wrong side of reaction against arms sales depending on how the Middle East shakes out.

On construction I will stick with TW, bought them @ 4.5p and sold @ 44p - shaved my bacon big time after the crash - bought them back @ 28p and now pushing 40+ again, I think they are well set when the housing market turns [as it must with pressure building on demand]

Miners are a hairy ride and I prefer to leave them to the people that know much better than I - Blackrock - Ruffer Baker Steel - JPM Nat Res funds give me great cover at very reasonable cost

ZEEDINE 18 Jan 2012 , 2:28pm

Buy TESSCO. The reason i say that firm comment is this. Here in Thailand they have very little competition . Their stores are full from 8 am until 10 pm seven days a week and they are planning to open many many more in quick time. Their next target in Cambodia. Some days the car parks are so full people are force to park on the streets, believe me their car parks are bloody massive when view again their British counterparts. They are fully aware where tomorrow is for them and its not England believe me.

snoekie 18 Jan 2012 , 5:47pm

I am continuing to eye Tesco, but at a slightly lower figure.

I bought Morgan Sindall 3 1/2 years ago, but was also looking at another Morgan (not Crucible, but I should have jumped in again when they were £1) which I missed then, now much higher.

Other than Mitie/Man (don't fancy), prices of the others too high for a decent stake.

smokeye 18 Jan 2012 , 6:55pm

Good diverse mix, long term.

chubbybrown 18 Jan 2012 , 7:44pm

ZEEDINE,
what about Makro?

are they not in Thailand

gtebb 19 Jan 2012 , 1:23am

Makro are in Thailand - and the local store to where I stay when I am there has a far bigger car park than the local Tesco Lotus store.

Not sure which stores Zeedine has seen in the UK but my previous local Tesco was a lot bigger than the ones I have seen in Thailand so far. Also the local Tesco in Thailand is not as busy as the local Big C stores - who have just taken over the old Carrefour stores who pulled out of the country completely.

ZEEDINE 19 Jan 2012 , 3:46am

You are very correct about the BIG C .Alas this would only confuse the issue as most of the readers on this site are UK based. The big C are an excellent company too. I LIVE up north 200 miles past Bangkok. vistit kho Samui often and see their stores their and in at least four other locations here in Thailand.. ALL with queues at the check outs.

Makro are customer orintated to trade customers and will not grow very quickly ,

ZEEDINE 19 Jan 2012 , 3:59am

Last week i saw in my wife's village a small Tesco shop in the high street and asked was this a new concept for them here. ( going small ) Answer; yes. They are doing here what they have done in England taken small shops in many high streets . Here their sole intention is to take the 7 /11 customers away from 7/11. 7/11 have 2500 shops here so they intend to hammer them too. They are expanding on two fronts Simultaneously

Enjoyyourmoney 19 Jan 2012 , 8:36pm

Is motley fool worth bothering with?

They tipped Tesco and it plummeted.

Are many of their tips successful?

PopPete.

7165 20 Jan 2012 , 11:35am

I came out of Mitie 6 years ago when the real growth leveled off, then into Aggreko. now that Aggreko has petered out somewhat my money is on (and in) APR Energy to be one of the biggest companies in the word in 5 years time, if its good enough for Madeline Albright and George Soros to pump millions into then its good enough for me!

HubyHooch 23 Jan 2012 , 9:24am

PopPete - a dull reply but I think Fool Tips are worth reading - not as they are always right (no one has a crystal ball) - but the way they describe a stock and the principles on which they base their tip are what is useful.

I've lost money on Fool tipped shares, but that's more to do with the way I have rushed in, rather than the tip itself. I've also made money.

Roundabouts and swings.

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