There’s nothing the stock market hates more than uncertainty.
Whether the great British public votes ‘in’, ‘out’ or ‘shake it all about’ in June’s EU referendum, the stock market is likely to breathe a sigh of relief that the build-up is all over.
There’s a good chance that the looming referendum currently weighs heavy on the markets, depressing valuations in the FTSE 100. In one possible scenario, June 23 could mark the start of a relief rally in shares. In another scenario, shares could rally as we move ever closer to referendum day.
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If either of those two outcomes manifests it could be wise to look for bargains right now. I’m starting my search with AstraZeneca (LSE: AZN), ARM Holdings (LSE: ARM) and Marks and Spencer Group (LSE: MKS) and here’s why.
Returning to growth?
Pharmaceutical giant AstraZeneca continues to make decent progress delivering from its development pipeline. We’re used to seeing earnings falling year after year as the firm deals with patent expiry on a number of its previous big-earning lines, but maybe that’s set to change and the firm will return to growth.
AstraZeneca’s chief executive reckons the firm’s growth platforms achieved an 11% rise in product sales and a 7% increase in core earnings per share during 2015. The company looks set to continue that momentum this year and anticipates six regulatory submissions, and around 10 major data readouts. Recent news releases from the firm are encouraging.
At today’s share price of around 4,140p, AstraZeneca trades on a forward price-to-earnings (P/E) ratio of 15 and the dividend yield runs at 4.7%. That valuation seems fair if a return to growth is indeed on its way.
A step-up in R&D spend
First-quarter results from ARM Holdings last Wednesday delivered a steady-as-she-goes outcome with revenue up 14% year-on-year and earnings per share up 15%. The chip designer’s chief executive reckons the trend of devices evolving from being digital, to smart, to connected generates large volumes of data that needs protection, transmission, and internet storage, all creating opportunities for ARM and its partners.
ARM is ramping up its investment in R&D, aiming to accelerate market share gains in areas such as networking infrastructure and servers, and to create new products to capture opportunities in the Internet of Things (IoT). The firm’s proactive approach that keeps it in the vanguard of new technological trends should keep earnings growing.
At today’s share price around 941p, ARM’s forward P/E rating sits just below 24 for 2017. That’s not cheap but is lower than for some time. If the firm develops new growth areas as it hopes, investors may be glad in the end they bought at today’s levels.
A double story
In M&S, we have a double story playing out. Food sales provide the growth element to the firm’s business whereas clothing and home sales remain sickly, thus providing the potential turnaround element.
Overall, the firm is making quiet progress. City analysts following the retailer expect earnings to improve by 5% in the year to march 2017 with a further improvement of 7% in the year to March 2018. At today’s 438p share price, we can pick the shares up on a forward P/E ratio of just over 11 for year to March 2018, which seems undemanding when we consider the firm’s 4.9% forward dividend yield.
