Despite the fact Neil Woodford has experienced a period of underperformance recently, he is still one of the most popular fund managers in the UK. As a result, many investors, myself included, like to keep an eye on his trades, to see what he’s buying, or selling, in his portfolio. Today, I’m highlighting two key FTSE 100 trades the portfolio manager has made in the last few months. Should you follow his moves?
BATS is back
Midway through last year, Woodford sold his entire holding in British American Tobacco (LSE: BATS). At the time, the sale made sense to me, as the stock had enjoyed a super run and gained 60% in just three years. With a P/E ratio of 23 and a yield of 3%, there wasn’t much value left on the table.
However, sentiment can change quickly in the stock market, and over the course of the next 18 months, BATS shares declined around 35% as investors lost interest in the tobacco sector. With the stock having returned to a more attractive valuation, Woodford has reintroduced it back into his portfolios and at 31 July, it had a 1.5% weighting in his Equity Income fund. A good move?
I think this is a great trade. At current levels, BATS offers considerably more value than it did in early 2017. It’s current forward P/E of 13 is much more appropriate for a tobacco stock and the prospective yield of 5.2% looks quite attractive.
Of course, with smoking rates declining across the Western world, there are risks to the investment case. Yet with the acquisition of Reynolds American under its belt, BATS looks to have the firepower to continue prospering and paying big dividends, in my view.
Legal & General has disappeared
Another interesting Woodford trade is the removal of Legal & General Group (LSE: LGEN) from the Equity Income fund. In the recent past, this has been one of Woodford’s top holdings. Yet all of a sudden, it’s been removed from the portfolio with very little explanation. This has surprised a few investors, with several voicing their concerns over the sale of the stock as well as the lack of transparency, on Woodford’s website.
Digging deeper, Woodford Investment Management analyst Anton Balint provides a very short explanation of the sale in the comments section of the website, stating: “Legal & General’s fundamental attractions, such as its cash generative quality and healthy dividend stream, remain very much in place. However, Neil views each position in the portfolios he manages from a relative valuation basis perspective – this means that some businesses can become more undervalued than others from time to time.”
In other words, Woodford sees more value elsewhere right now. But was he right to remove the stock entirely from his portfolio? Personally, I’m a little confused by this trade – especially given the fact Woodford’s fund is meant to be an ‘income’ fund.
I continue to see a lot of attraction in Legal & General from an income investing point of view. Recent results showed that the group has momentum, with five of its six businesses increasing their operating profits for the first half of 2018, and the stock’s P/E of 8.9 and dividend yield of 6.4% look attractive, to my mind. I own LGEN in my own dividend portfolio and I have no intention of selling any time soon.