Investors should avoid safe haven mega-cap stocks as rising share prices are no real indicator that the shares will offer good returns.
Money market experts are seeing investors racing to snap up mega-caps on the basis that sooner or later their yields will reflect the buying price.
But many doubt the investment strategy will offer the expected rewards investors are after.
Chris White, manager of the Premier Income fund, is concerned inexperienced investors are in denial about stock prices and try to justify their financial decisions with the hope dividends will eventually rise to underwrite their investments.
However, he is concerned that their judgement is skewed and the stocks will never repay their costs in hard cash.
Justify valuations
“Many investors are following the herd instead of sitting back and making sensible decisions,” he said.
“A lot of these stocks were trading at up to 14 times earnings just 24 months or so ago, and investors did not want them then. Now they are returning up to 20 times earnings and investors want to dip in to the pot.”
White’s view is that despite some stocks increasing in value as general economic conditions improve; other stocks and shares may offer better value than mega-caps.
“Investors can find opportunities across the market if they are prepared to look hard enough,” said White. “But they need to be cautious and do their homework to find the best.”
From large-cap companies, White favours energy conglomerate Royal Dutch Shell, bank and financial firm HSBC, engineering group BAE Systems and insurer Resolution.
“These companies yield dividends of around 5% regularly, which is really the minimum an investor should be looking for to justify the cost of shares.”
Tips for investors
Less popular with White are drinks firm Diageo and Unilever.
“These are shares considered as safe havens by investors. Their value has increased more as a result of that sentiment than corporate performance in contrast to the others which pay a regular return,” he said.
White’s tip for investors is to set aside valuations or yields and look at cash flow. He suggests looking for valuations built on a strong balance sheet bolstered by cash in the bank.
“As the markets continue to readjust, strong companies will increase share value and dividend returns, while those with inflated prices and a lack of cash will fall back,” said White.
And his tips for 2014? Look at insurance and media companies.
Rising markets boost income from equities, which power the profits of financial funds, while companies are taking the brakes off advertising to increase revenues for media firms, he says.
