UK stock market investment ideas for 2021: Part 3 – lucky dipwritten by Bella Palmer
In the first two parts of this extended series of UK stock market investment ideas for 2021, the companies highlighted followed a theme. Part 1 took a look at stocks that have been battered and bruised by the Covid-19 pandemic conditions of 2020. We picked out companies in commercial property, hospitality and travel and tourism that look well placed to gain market share ahead of more cash-strapped peers as life returns to normal.
In part 2, our focus was on a selection of London-listed (and one infiltrator from Wall Street) stocks that have had a good 2020 but look like they still represent some good further upside potential.
In part 3, we’ll mop up with a lucky dip of five stock market investment ideas we think have strong prospects for the year ahead. But unconstrained by any particular theme.
But before we get into the last five investment ideas we want to present, let’s take the opportunity to lay out the usual accompanying caution. Forecasting the fortunes of individual public companies is by no means an exact science. Under normal conditions there are so many internal and external factors that can come into play and compete against each other that, like weather forecasting, things can quickly change.
That doesn’t mean there is no value in analysing investment opportunities in an attempt to beat the market. Many investors do so successfully, especially when their investment portfolio is in it for the long-haul and faces little pressure to deliver to a tight schedule.
But when it comes to picking individual stocks, there will always be misses. Not even the best analysts and investors get it right all the time. But that’s ok. The aim is not to get every investment call right but for enough of them to work out that a portfolio delivers overall returns over many years.
Treat these 2021 UK-focused investment ideas as just that – ideas you might want to follow up with more research. With a firm commitment to a well-diversified portfolio that isn’t overly reliant on the performance of any single stock, sector or geography.
With a strong 2020 behind it, intellectual property investor IP Group could quite easily have fitted into part 2 of our series. The stock is up over 30% for the year-to-date compared to its closing level of 2019.
IP Group, formerly IP2IPO, is a FTSE 250 member with an alternative business model. It has similarities to a venture capital or private equity vehicle I that it invests in early stage and growth companies. But IP has the very particular focus of investing in and helping commercialise ideas that come out of the UK’s top university laboratories, including the Oxbridge pair and Imperial College London. In total, IP has partnerships with a total of 17 UK universities, including those with the most productive laboratories.
The company’s value took a hit as a result of the Neil Woodford fund scandal last year due to the fund offloading its stake in the company in a cut price deal. But its since recovered well and is currently worth around £1 billion.
IP Group’s business model means it has early access to some of the most promising biotechnology IP coming out of the UK’s top university labs. That allows it to pick up the big commercial hits of the future potentially years before anyone else. Though such early-stage investments are intrinsically high risk.
But next year holds plenty of promise for IP Group, with Oxford Nanopore, which it owns a significant stake in, potentially gearing up for a 2021 IPO.
As a fund, and one that comes with a not insignificant but we think reasonable 0.98%-a-year fee, Chrysalis Investments is a bit of a different animal to most of the rest of the ideas in this series. But we think worth a mention.
The fund invests in mainly British tech companies. The UK has been much maligned for its failure to produce big tech companies on the same level as the sector’s champions from the USA. But Chrysalis holds some very prospective stakes, with TransferWise, Graphcore, which develops microchip designs specifically for AI and machine-learning, and ecommerce consumer credit company Klarna among its biggest holdings. TransferWise looks set for a big IPO next year. Klarna could also go public next year or soon after.
The strength of Chrysalis is that it gives retail investors access to the kind of big, still-private technology companies they normally wouldn’t be able to invest in, before they go public. The fund currently trades at a premium of around 6% to net asset value but a couple of major IPOs like those of TransferWise and Klarna coming to pass should unlock plenty of value.
The bidding war for UK computer games maker Codemasters over the past couple of months has highlighted the sector’s potential. And the gaming industry is going to keep getting bigger. Dublin-based and London-listed Keywords Studios doesn’t develop computer games itself. It’s basically an IT outsourcer, but one that provides services specifically to the video games development sector.
Keywords has already had a very strong 2020, boosted by the increased spend on gaming during the Covid-19 pandemic. But there should still be plenty of potential left in the stock. Acquisitions of audio recording specialists Jinglebell, and gaming sector-specialised PR firm Indigo Pearl, look like good strategic fits than expand the services offering. And analysts expect annual earnings to grow by around 10% for 2020 and 21% in 2021. It wouldn’t be a big surprise if 2020 revenues growth beats those forecasts.
With a forward price-to-earnings multiple of x46, Keywords certainly isn’t a cheap stock. But the long-term profit outlook supports it and this well-run company is in a serious growth sector.
AIM-listed CloudCall represents a fair amount of risk, but there is also a lot of potential upside in the cloud-based integrated software provider. CloudCall’s products help businesses to improve their communications systems and are integrated into existing CRMs.
The software is gaining particular popularity with businesses that make large numbers of outbound business calls, that need to be well organised and tracked, with recruiters a prime example.
Having raised £12 million through a 2019 share issue, CloudCall is in a strong financial position, with around £3.8 million of cash-to-hand and its software-as-a-service business model is lucrative with strong margins. It currently earns around £7 for every £1 spent on customer acquisition, and a number of U.S. institutional investors have taken positions on the company over the last year.
The company is still loss-making and is likely to be for some time. But it has enough in cash reserves to now make a big push over the next couple of years. If things go well, returns could be big. But this is an illiquid stock and could be hard to get rid of quickly if disappointments push investors towards the exit doors in numbers.
One for the high risk to high reward corner of an investment portfolio.
FTSE 250 constituent Contour Global wraps up our selection of five 2021 investment ideas and is a direct contrast to CloudCall in nature. This idea is a somewhat defensive and long-term option. It could be considered a hedge against a cold economic wind sweeping through following 2020’s troubles.
Countour Global builds and operates power stations, and so shouldn’t be hit hard by any economic downturn for the global economy, even if longer and more severe than expected. It hasn’t had any adverse impact from the Covid-19 pandemic.
With a price-to-earnings growth reading of 1.2 for 2021, Contour could be considered a value buy. It seems cheap, especially against the backdrop of a 6.5% dividend that looks secure. A buy-and-long-term-hold option, that could also help hedge against stock markets turning bear over the year ahead.
That wraps up our 2021 UK investment ideas series. We hope you have plenty of food for thought and we’ve highlighted some interesting investment opportunities for next year you want to explore further. Good luck!
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