Exactly a year ago, I backed two very different stocks for two very conflicting reasons, and said both were too exciting to ignore.
It’s been a pleasure to look back since both have seen their share prices rise by a third in the last 12 months. Can they repeat the trick in 2020?
Standard Life Aberdeen
One reason that FTSE 100 asset manager Standard Life Aberdeen (LSE: SLA) caught my eye was a lowly valuation of just 6.7 times earnings, which I thought was far cheaper than it should be, despite the undoubted challenges facing the group. At the time, its share price had collapsed by around half, but this year the only way has been up.
The merger between Standard Life and Aberdeen Asset Management took time to prove its worth, especially since the group lost a £109bn mandate to run funds for Scottish Widows on behalf of Lloyds (an appeal was partially successful).
Stock markets have risen strongly this year, which is always good news for fund managers, and Standard Life Aberdeen posted both a drop in outflows and rise in assets under management. Despite that, first half figures showed profits before tax falling around 10% to £280m, partly offset by a drop in operating expenses.
The £7.17bn group has been strengthening its position by launching new funds and expanding in Asia, but much will depend on how stock markets perform over the year ahead. The going could be tougher, as global growth slows and geopolitical worries mount, although I don’t expect a crash.
Its forward valuation now looks a little toppy at 16.9 times earnings. It does offer an attractive yield of 7% but cover is thin at just 0.8, and low forecast earnings growth completes the mixed picture. Standard Life Aberdeen looked like a buy last year, but a hold today.
RWS Holdings
My other tip was language, intellectual property support, and localisation provider RWS Holdings (LSE: RWS). This was hugely expensive when I tipped it, trading at 26.9 times forward earnings, partly due to a 60% rise in its share price over just two years. However, it has thoroughly justified this valuation, rising 36% since I tipped it.
This acquisition-hungry AIM-listed company had developed the appealing habit of delivering double-digit earnings growth, up 35%, 31%, and 22% in the three years to 30 September 2018. It maintained that performance this year, posting another 22% earnings growth.
December’s full-year results showed record performances across all three of its main businesses, with revenue up 16% to £355.7m, while adjusted operating profit climbed 18% to £78.4m.
The attractive picture was completed by a 43% drop in net debt to £36.8m and a 17% rise in the total dividend for the year to 8.75p. This £1.71bn group may not look like an income seeker’s dream, with a forward yield of 1.7%, but a progressive management attitude and dividend cover of 2.4% means it shouldn’t be underrated.
My worry is that it is even more expensive today, trading at 31.7 times forward earnings, and earnings growth is predicted to slow to ‘just’ 8% this year. Today I’d call RWS a satisfactory hold, rather than a great screaming buy.