Which Share Should I Buy Next?

Published in Investing on 11 May 2012

A novice Fool is asking for your help.

It's not easy being a novice investor.

Almost every time I've looked at the My Scorecard tool within Motley Fool Share Advisor, there it is... taunting me:

"Your longest-held stock is CNA -- it's been in your portfolio for 2.7 years."

True, the share has lagged the market, but I'm still up 20% since I took the plunge and bought Centrica (LSE: CNA) almost three years ago. I've also enjoyed the dividends to boot.

So what's my problem with this helpful snippet of info?

Well, it's actually the 2.7 years that's bugging me --­ because that purchase of Centrica marks the start of my first (serious) attempt at building a proper share portfolio using money held within my SIPP and ISA.

Right now, My Scorecard reminds me that I find myself holding 15 companies -- and something that's starting to resemble a grown-up portfolio!

But perhaps more worrying, it also reminds me of a very real dilemma that I need to face -- where am I going to allocate the new cash coming into my portfolio each month?

It all seemed so simple to start with…

To date, new money has been invested straight into new stock ideas and, with a couple of exceptions, I've roughly invested the same amount each time. My strategy is what you'd call 'Motley' -- so some growth plays and some dividend stocks -- although I'm definitely skewing towards the dividend payers.

But I know my current approach can't continue indefinitely -- I just can't see myself having the time to keep track of more than 20 shares!

One solution then? Adding to my existing positions.

Sounds simple right? After all, I bought all my shares with a view to hold for the long term, so surely there must be some top-up opportunities in there.

But how do I decide what to target, and how do I avoid becoming too overweight in any given company?

As a novice investor, this feels like starting all over again!

I decided it was high-time to knuckle down and take my first-ever look at my portfolio's asset allocation.

Breaking it all down

ShareGain / Loss% of Portfolio
Imagination Technologies (LSE: IMG)129%9.6%
Apple (Nasdaq: AAPL.US)62%9.4%
Tesco (LSE: TSCO)-21%8.1%
Zipcar (NASDAQ: ZIP.US)-30%7.5%
Reckitt Benckiser (LSE: RB)13%7.3%
GlaxoSmithKline (LSE: GSK)13%7.2%
MITIE (LSE: MTO)34%6.9%
Vodafone (LSE: VOD)9%6.2%
Centrica (LSE: CNA)20%6.2%
Land Securities (LSE: LAND)17%6.0%
Unilever (LSE: ULVR)19%6.0%
Hargreaves Lansdown (LSE: HL)11%5.7%
AstraZeneca (LSE: AZN)-6%5.4%
Chime Communications (LSE: CHW)5%4.3%
Admiral (LSE: ADM)-22%4.0%
 Average gain: 17%100%

(*Initial investments in Tesco and Zipcar were twice that of the other shares. Figures as at 29/04/2012)

Holy Excel pivot tables, Batman! What I thought was an evenly balanced portfolio is looking decidedly weighted toward 'consumer essentials', tech stocks and pharmaceuticals. Actually it turns out that:

  • 21.4% is allocated to consumer names Reckitt Benckiser, Unilever and Tesco;
  • I have 19% exposure to the technology sector -- thanks to sterling performances from Apple and Imagination Technologies over the past few months;
  • 12.6% is allocated to pharmaceuticals through my GlaxoSmithKline and AstraZeneca holdings, and;
  • 9.7% is assigned to financial services -- that'll be Admiral and Hargreaves Lansdown.

Which in turn leaves:

  • 7.5% in vehicle hire -- ZipCar
  • 6.9% in outsourcing -- MITIE
  • 6.2% in telecoms -- Vodafone
  • 6.2% in energy -- Centrica
  • 6% in property -- Land Securities
  • 4.3% in PR and Marketing -- Chime Communications

So what's a Fool to do?

To my mind, I'm clearly pretty overweight in ZipCar, and with a P/E of around 129, this is an American growth stock I intend to hold for the long term. However, I don't need any further exposure.

Also, given the recent press attention Chime Communications has received, and the forecast slowdown in its earning, that share is firmly on hold for me right now.

So that's two quickly eliminated.

It's looking like I've become underweight in energy, telecoms and property, and that taking some further positions in these sectors would help rebalance my portfolio -- helping to lower my exposure to consumer essentials and technology.

Now given the fact that the UK has officially returned to recession, and the eurozone crisis will rumble on for a good while yet, I'm drawn to the defensive and high-yielding qualities that both energy and telecoms have to offer -- a sentiment shared by dividend ace Neil Woodford.

(To see what Neil's portfolio looks like, I recommend you read this special report: "8 Shares Held By Britain's Super Investor" -- it's free!).

Land Securities and MITIE also seem like less certain positions to top up on for now given the uncertain economic outlook, but let's keep them in mind for the time being.

How do the final four compare then, looking at their forecast data for the next year?

CompanyForward P/EEPS GrowthDividend Yield
MITIE11.8 (Mar 13)+9%3.7%
Centrica11.5 (Dec 12)+6%5.1%
Vodafone10.3 (Mar 13)+6%7.6%
Land Securities19.6 (Mar 13)-2%4.1%

On a net asset value basis, Land Securities currently trades at a discount of 14% at 746p. But even so, commercial property looks susceptible to any further downturn, plus there are juicier yields to be had. I'll pass.

The forecast yields on Centrica and Vodafone certainly look attractive, combined with reasonable growth predictions. For now, I think I'll take them over MITIE.

So how do the final two stack up against direct competitors?

Well, energy group SSE (LSE:SSE) seems to have the edge on Centrica when we compare the forecast data, but interestingly seems to be out of favour with the market. That may represent an opportunity -- and you can read Fool analyst James Early's take on SSE in this "Top Sectors For 2012" report (this is free, too.)

BT (LSE: BT-A) is cheaper relative to Vodafone, but its forecast yield is much lower. With BT, I feel you are getting the equivalent growth prospects, but also taking on the risk of a pensions black hole.

CompanyForward P/EEPS GrowthDividend Yield
SSE11.2 (Mar 13)+8%6.2%
BT8.7 (Mar 13)+6%4.7%

My conclusion, then? I think I'll be taking a further position in Vodafone, and either opening a position in SSE or adding to my Centrica holding -- but not before full reviewing my investment thesis on each!

However, what do you think Fools? What would you do with this portfolio (I'm 33). Over to you, in the comment box below!

At last -- a special free report that introduces novices to shares! "What Every New Investor Needs To Know" and The Motley Fool are helping Britain invest. Better.

Further investment opportunities:

Andrew owns every share mentioned in this article, save for BT and SSE. The Motley Fool owns shares in Hargreaves Lansdown, Imagination Technologies and Tesco, and has recommended shares in Hargreaves Lansdown and Unilever.

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

tux222 11 May 2012 , 9:03am

Personally I'd say you need a real energy company - Centrica is rather more a distributor of energy. The big three are BP, Shell and BG. Tullow is smaller, but has a great track record. I've been holding it for many years, and my only regret has been not topping up in the past.

There's an element of personal hedging. If energy prices rise it'll hit you in the pocket but probably raise the price of an energy stock, and vice versa.

apprenticeDRL 11 May 2012 , 9:54am

Personally I would go for BP, I think the price is cheap at the moment and am looking to top up my holding myself. The PE is approx 4.7 and dividend yield ao about 4%

Wuffle 11 May 2012 , 10:31am

Hi,

Adding 5% to most of these holdings or any other will not look ridiculous and will balance out soon enough.

With no prior knowledge of IMG;
A novice doubling their money in two years is the definition of a fluke. The 'growth' in growth stocks comes in fits and starts and you may have just had it.
At least consider cashing out of IMG (arguably AAPL as well) and buy a 'forever' stock yielding about 5% e.g. GSK, VOD. for the long term.

I wish I'd figured this out earlier.

Wuffle.

Rotation96 11 May 2012 , 11:13am

Hi

You're so close to me in your investment career I felt the need to join up and comment. You're basically where I'd like to be in about 6 months having started investing in a similar way about a year ago.

I think you've already had some pretty good advice. Even if you doubled your positions in any one company from MITIE down then it wouldn't look out of place (you've already ruled out everything above that for good reasons). I also like the idea of you picking up a big oil company. I personally hold Shell and think that their extra R and D spend, solid value credentials and the fact that everyone is talking about BP puts them ahead. However, Beyond this I don't think there's a need for you to look for another big company 'forever' type stock, you've already got around 6 out of 15. I would suggest that adding to the positions of those you have (I would suggest LAND and VOD, I hold neither but having been looking at both for quite a while) would reduce the risk of your portfolio becoming a FTSE 100 tracker (research has suggested that 15 companies is plenty to form a tracker for a private investor). That said, I work in the power industry and out of the 'big 6', I think that SSE are the best out there (I don't work for them nor hold any shares).

I'm definitely a 'value' guy but that doesn't mean you can't go in for some small caps too. I would suggest (with no meaningful research) that IMG's value has been realised (either completely or in part) and you should look at the company's prospects anew and ask yourself if you would buy them now, at the current price. If not, seriously consider taking your profits and finding a couple of other small cap prospects (which can still have some serious value credentials).

Good luck!

timeandpatience 11 May 2012 , 1:00pm

There was an interesting piece in last week's Bearbull column in the IC. If memory serves me correctly, Bearbull started his income portfolio with £100K fourteen years ago and the capital has since rised to £281K. He has also received £100K of dividends on top.

Two of his largest (out of a small portfolio) current holdings are VOD (acquired quite recently) and SSE (acquired years ago for around £6 I recall). Either would get my vote.

richjfool 11 May 2012 , 1:17pm

I hold Centrica and SSE. Centrica seems to be more favoured by the consensus of brokers, though I understand TMF favour SSE.

I think I'd be topping up Vodafone, Unilever and Glaxo (in that order) from your portfolio, or adding in something like Compass.

apprenticeDRL 11 May 2012 , 1:18pm

re Timeandpatience I also recall that his largest holding is Carr Milling, I am currently investigating this share as it does seem to offer an interesting diversification which is both an agricultural supplier (deemed a growth area by many at the moment) and has light engineering for the Nuclear industry (also potentially interesting).

damnedfool123 11 May 2012 , 1:29pm

Hi,

I read your article with great interest, as I'm also around the same age and building towards a "grown up" portfolio after a couple of years of dabbling in the market with mixed success (under no illusions as to my ability as a super investor with a couple of reasonable gains followed by several losses!).
I'm currently holding 6 companies (TSCO,AZN,REC,SSE,AV,GSK)and am ultimately aiming for 10-15, with BP,VOD,RB and ULVR on the current watchlist.
I'm a little biased on the pharma side at present with around 40% of my total holdings in AZN and GSK, and I'll be looking to balance this out a bit with future purchases, but I felt they were both good prices to get in at, and with both being heavyweights with a strong dividend I'm not really losing any sleep.
I've now settled into a comfy regime of monthly additions to my ISA (with the odd top up from time to time when I can afford), and one or two purchases per year, so it'll take a bit of time yet to get to my ideal scenario of a low maintenance portfolio which favours high yielding stocks, but it's a comfortable strategy which works for me, as I now don't miss what I'm putting away each month.
I recently did a simple projection of where I'd be with my investments in 25 years, (assuming a continous drip of cash each month and measuring against varying degrees of success) and found it really helped to focus my mind on how I need to shape my investing strategy. I've decided to monitor my portfolio performance against my projections with a quick (20min) review each month for the next couple of years to see how I'm doing, and may well change according to progress, although the hope is that I won't need to do much!

I personally like the stocks you're contemplating, so I would agree with your top-up strategy at present - but I also agree with some of the comments above and I'd take some of the gains you've made to further top-up some of the bigger companies at great prices!

Good luck however you decide!

GrangeInvestor 11 May 2012 , 1:35pm

I wouldn't worry much about balance in terms of industry sectors; what's important is getting good companies at good valuations.

A couple of my themes are i) looking for companies who'll benefit from the growth of e-commerce and ii) companies focused on emerging markets.

You've got Tesco who I reckon will end up an e-commerce leader in the UK and you've got GSK, Unilever and Vodafone who all have great emerging market exposure.

For your top-up I'd go for Tesco or Vodafone because they both have great growth potential and also have great dividends.

timeandpatience 11 May 2012 , 1:57pm

re Apprenticedrl - yes I think Carr Milling was also written up as a tip in the IC last week as well, had a quick look and (again from memory) it had some good value criteria but think its market cap was too small for me.

dukindiva 11 May 2012 , 4:15pm

Well Andrew you are truly a fool if your entire portfolio consists of only equities.

There is evidence that you can be sufficiently diversified by holding shares in as few as a dozen sectors as long as you are also investing in other asset classes.

At your age you can afford to be fairly aggressive with the amount of shares you hold in your portfolio but more than 60% is considered as very aggressive. You should look at bonds, land/property, gold, cash etc too.

Accumul8er 11 May 2012 , 5:39pm

I think a missing sector for diversification is resource stocks - so possibly BP or Shell - I liked tux222's point about an element of hedging.
Also consider BHP Billiton which is a play on China and other emerging markets. I know some will say that China is cooling and commodities are past the peak cycle but BHP has fallen back a lot and is purpoortedly on a prospective PE of 8 and yield of around 4%. It could fall further in the next few months but personally I think the commodities supercycle has another 5 years to run.
Or for a more diversified play, BR World Mining IT on a discount of 11% to NAV.

stupudfool 11 May 2012 , 6:43pm

Property: Have a look at Alpha Pyrenees Trust (ALPH). It's taken a battering lately due to the 90% French Commercial Property holding (euro crisis/French elections) but look at the tennants (86% Blue Chip), the yield, the outlook, LTV intervals, the management, no stamp duty, Director purchases, quality of the portfolio. Just take a look.

taken2often 11 May 2012 , 11:29pm

I started Income investing seriously about 10 years ago. I bought a batch of PIBS and they have been paying 6.5% all that time and I have added to that over the years so the average yield must be about 7to8% gross. I also bought Preference shares which average about 8.5%. I bought Utilities that average about 5 to 6%. With the income coming in I started to index by buying other shares and Investment Trusts all paying above 5%. I have used the nearly the same stocks in my 3 SIPPS, 1 ISA and one Fund and share account.

I must have about 40 odd items. The fixed interest stuff needs little attention. Although I have been caught out by Bradford and Bingley and Northern Rock PIBS. They may start paying again.

Regardless of age the objective has to be income, then you can weather violent swings in the markets over a 30/40 year period. More importantly you do not need to sell stock for income. This is fatal.

I would take some profit and spread it round. If you have a wider spread your risk can go down to 2 to 3%.

You only sell if the dividend stops or is greatly reduced.

Early last year some of my portfolio's were nearly all red but there coming back. I just saw a buying opportunity and ended up with a big increase in income flow.

If your young then it can be possible that 20/30 year period your dividends and investment income can be greater than your salary. Thats the ideal. Growth investing looks great when it works but big swings over the years can decimate it and you may have to sell stock at the worst time for pension funds etc.

Hope this is helpfull

Cheers

gezmondo 12 May 2012 , 12:53am

Ignore the commentators who haven't researched imagination tech......it has a conservative 50 - 70% market share for 3d graphics chips or GPUs and is thus a world leader........it is directly exposed to some of the fastest growing sectors ie ipad/ tablet growth and smartphone growth. It is in a similar position to ARM many years ago. It shipped over 200 million units in 2011 and is expected to ship a billion units in the next 4 - 5 yrs , so still has huge growth ahead even the very conservative ceo has staed that many areas of the companies technologies are at an early stage of commercialisation with significant growth ahead for the next few years

OldJock 12 May 2012 , 2:07am

Hi Andrew,

Well done on building a reasonably diversified portfolio... if it was my money and I wanted to buy blue chip shares, then I would be investigating RDSB/BP; BLT; or SSE; however, at the moment I feel the FT250 is offering some good value at the moment... CHG is about 335p with 'guaranteed' earnings of 55p for this year putting it on a forward PE of 6! (not bad for a growth company...)

Lastly I would look into an IT run by Neil Woodford called the 'Edinburgh Investment Trust' (EDIN)... good value and better performance with a better yield than his invesco fund(s)...

DYOR, ATB,

Old Jock

yossa123 12 May 2012 , 6:57am

Hi Andrew,

I think it is worth providing a bit more information on your age and situation and what you aspire to from your investing and the timescale involved. It would allow the valuable advice and experience from the above posters to be more focussed towards your needs.

I did select your name at the top of the post but it only brought up the TMF full time advisors. I am assuming this is not a case study by one of the TMF advisors but a real MF member seeking advice.Apologies, I could not find your profile whan I did a search.

Rotation96 12 May 2012 , 12:01pm

Re:IMG for Gezmondo. Thanks for the link to the article and at this stage I'm happy to believe that IMG is a very good business. However, can any business justify a P/E of over 80? Great businesses is only half the equation, and at some point IMG will come up against competition (as your link suggests) and their interim profits for the first 6 months are down on last year. People tend to over-react when a company like this doesn't quite deliver spectacular results even if it does end up becoming a giant. For instance, Vodafone peaked at about £4 in 2000, even as the undoubted giant it is now I wouldn't value it that highly and clearly no-one else would either because its never regained that price. Should something similar happen to IMG even reducing it to a more reasonable 'growth' P/E of 20 to 30 it would still destroy a lot of Andrew's profits, possibly for a very long time. Yes it could grow more, but of course the return from topping up one of his stalwarts or adding a couple of new small value stocks could also give him a great return, and I would suggest there is a higher probability of that.

Linked to this, re:Dukindiva, is it really worth adding assets such as bonds or gold which are operating at historically high valuations compared to equities just to be 'less aggressive'? Wouldn't it be better for someone young like Andrew (and me) to view the asset classes in the same way you'd view an individual equity, ie buy something good at a low price? So in the future when equities are higher and bonds and gold have dropped back you could diversify then.

I must admit, I do quite like the look of ALPH though.

dukindiva 12 May 2012 , 12:22pm

Well Rotation96,

you probably answered your own question regarding asset classes.. I would hate to have large chunks of my portfolio wiped out by a stock market crash.
Often, this is when things like bond yields & gold prices rise which offsets some of the damage.

If you are investing in a SIPP for instance, you may be wise to gradually reduce the percentage invested in shares unless you are confident in your 'defensives'.

At the end of the day, everyones attitude to risk is different, so there are many points of view out there, I'm just expressing mine.

MrBearBull888 12 May 2012 , 12:28pm

Hi Andrew

You have done very well much better than me! I notice you hold some shares that have been in TMF premium services Dividend Edge now defunct and CSPRO did you use those services to help you with your selections?

Lastly what's your view on ADM and AZN I don't hold ADM but have AZN. I really have my doubts on it!

goodlifer 12 May 2012 , 8:09pm

dukindiva
.
"There is evidence that you can be sufficiently diversified by holding shares in as few as a dozen sectors as long as you are also investing in other asset classes."

Where can one find this evidence?

goodlifer 12 May 2012 , 8:28pm

"ZipCar... with a P/E of around 129."
Is this really true?

FWIW, if any share of mine could fetch 25 or more times earnings, I couldn't sell it quick enough.
But I'm no riverboat gambler, just a devout coward.

Can only say,

Best of luck, Jack.

ANuvver 12 May 2012 , 8:53pm

I wouldn't be in a hurry to add anything at the moment.
Stockpile cash or equivalent - I believe there are better opportunities coming very soon. A couple more eurowhacks will put us down through 5,4 and I'll be interested again.

Cue howls of "market timing!", "get 'im off!", "don't like the look of yours much" and "rhubarb rhubarb".

dukindiva 13 May 2012 , 12:46am

Goodlifer,

I'm not trying to wriggle out of this, but even with a quick Google search you will find (mostly non-scholarly) articles that tell you that you can can reduce unsystemic risk by about 70% with about 30 shares, even if thats all you invest in. That goes down again when you also invest in other asset classes.
I came across this view when I studied Investment Strategy as part of my MBA.
The articles where free when I studied, but sources such as Emerald Insight, JSTOR and even Wiley Educational are rarely free to non students. Try Google Scholar if you are interested.

goodlifer 13 May 2012 , 7:09am

Thank you dukindiva,

All the articles I've come across so far seem to be long on doctrine, short on actual evidence.

goodlifer 13 May 2012 , 1:43pm

I know it's all pretty daunting, but it seems to me your main problem is you're spoilt for choice - more of a molehill than a mountain, whatever it my feel like.

As it happens I'm due to reinvest this month's dividend payments on Tuesday.
Like you I hold TSCO,: RB, GSK, VOD, CNA, ULVR and AZN, and I'd be quite happy to buy more of any of them.
When the time comes I'll have a check on Tuesday's prices to see which looks like the best bargain.

Diversification - I just try not to do anything crazy.
Is their any point in working it all out to three decimal places?

gezmondo 13 May 2012 , 10:24pm

re Img - rotation96

Thanks for your comments
I agree there is certainly room for disappointment on such a high pe. The final results are the 19th june andvI think they will beat expectations. I don't know where you saw the drop in profits for the 1st six months :-

Interim results

Technology revenues increased 41% to £42.6m (2010: £30.3m)
Licensing revenues up 65%; high levels of activity across IP portfolio
Royalty revenue up 26%; 29% on a US dollar basis

PURE £13.7m (2010: £13.8m)
Tough retail environment in UK offset by strong overseas growth

Adjusted pre-tax profit* up 52% to £15.3m (2010: £10.1m)
Reported pre-tax profit up 35% to £10.4m (2010: £7.7m)
Adjusted earnings per share* up 48% to 4.9p (2010: 3.3p**)

Reported earnings per share 3.0p (2010: 4.8p)
Reduction due to a £3.9m tax credit in 2010 compared to a £2.7m tax charge in current year
No UK tax payable, £18.3m deferred tax asset as at 31 October 2011

Cash balance increased to £56.1m at 31 Oct 2011 (30 April 2011: £49.4m)

be7sensible 14 May 2012 , 5:04am

You do not build a portfolio: it builds you, which is to say that you should not buy shares because you want to - you wait until there is a mini-crash, then you act.
Dump Zipcar and Admiral because you must learn to take losses at, say, 15%. Hold Tesco. When Footsie is 5400, then act again; look for all good companies which have become cheap. I got AZN at 5400 during last year's mini crash and you can do the same. Be Patient; invest when the market is low, not because you want to build a portfolio.

merchantprince00 05 Jun 2012 , 11:24am

Hi,
wouldn't disagree with either Vod or SSE and hold both in my portfolio along with a few others that you hold

http://adventuresinequities.blogspot.co.uk/2012/05/investment-update-vodafone-results-ye.html

http://adventuresinequities.blogspot.co.uk/2012/06/stormclouds-over-europe-saw-ftse100.html

As with all things there needs to be a balance and the balance and diversification (which I also wrestle with) looks reasonable in your portfolio and more fairly weighted than my own.
Taken to its ultimate goal you could diversify your performance to zero which would just leave dividends.

However, with a suitable horizon (you are only 33), the options are plentiful so I would continue to concentrate on cashflow, debt (and industry), and dividends and perhaps most importantly, patience (as you have been with CNA).
Another sector that is absent here is aerospace (I hold RR and GE) where R&D can lead to a 20-30 year income stream.

And when considering CNA, SSE et al, you have not mentioned NG.


Best regards

MA
http://adventuresinequities.blogspot.co.uk/

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