New Year NAPS - Top Stocks for 2022 with lessons from the Tao

One of the joys between Christmas and New Year is the time it brings us all. After all the mess of gift giving and receiving is over and relatives have left… there’s a moment where you realise you’ve finally some time for yourself. It’s in these gaps that we have moments for reflection, to make new resolutions, to read, to ponder… or just lie around and eat a pot of honey. I found myself nostalgically reading “The Tao of Pooh” and reflecting on some of the things I’ve got wrong in 2021 - namely trying to do when not doing would have done just fine. On reflection, the NAPS embodies a number of taoist principles, and it’s in this vein that I’ll review what’s been another good year.

NAPS Portfolio Performance 2021

The NAPS Portfolio appreciated by 28.3% through 2021 (excluding dividends & transaction costs) versus the FTSE All Share at 14.5% (18.6% including dividends). In spite of a reversal from the 39% high on September 1st, it has been a remarkably strong showing in a year when so many portfolios have suffered.

The Long Run Performance

For those that need reminded, the NAPS is my “no-admin-portfolio-system”. A 20 stock portfolio from the highest StockRank stocks, diversified fairly equally across all 10 sectors, rebalanced annually. It’s a “select once, leave for a year portfolio” that requires no more than an hour to put together, but has performed remarkably well over the last 7 years. With more than an 18% annualised return over this period, £1 would have grown into ~£3.23 following this process in a tax efficient wrapper.

Please note that the above performance excludes dividends for both NAPS and FTSE All Share. The FTAS has a 49% total return (including dividends) over the same timeframe. I prefer to exclude the impact of dividends from NAPS performance tracking as it is a conservative way of factoring in transaction costs.

If you’d like to learn more about the NAPS - you can catch up on all the articles in the blog archive here. There are also some videos on Youtube which I keep promising to update and will do soon.

Winners and Losers 2021

While Reach (LON:RCH) couldn’t hang onto all of its gains this year, it still managed an 88% return before dividends, closely followed by a strong showing by Somero Enterprises Inc (LON:SOM) , Wynnstay (LON:WYN) , Drax (LON:DRX) , Up Global Sourcing Holdings (LON:UPGS) and Sdi (LON:SDI) . Those “Bold Bets on Big Mo” have indeed paid off.

15 out of 20 of the holdings generated a positive price return, with some unfortunate losers in Cmc Markets (LON:CMCX) , Mcbride (LON:MCB) and John Wood (LON:WG.) But it’s the average that counts - and a 75% “hit rate” of winners is above average for the portfolio.

The perils of being a Bisy Backson

The Bisy Backson is always going somewhere, somewhere he hasn’t been. Anywhere but where he is. “That’s just it,” said Rabbit, “Where?” “Perhaps he’s looking for something.” “What?” asked Rabbit. “That’s just what I was going to say,” said Pooh. And then he added, “Perhaps he’s looking for a—for a—” For a Reward, perhaps. Our Bisy Backson religions, sciences, and business ethics have tried their hardest to convince us that there is a Great Reward waiting for us somewhere, and that what we have to do is spend our lives working like lunatics to catch up with it.

The underperformance of the UK’s junior market ( FTSE AIM All Share Total Return +5.6% ) illustrates what has been a sobering year for stock pickers in general. One way of monitoring the conviction interests of private investors (subscribers and non subscribers) has been the Stockopedia Challenge. It’s a competition that we’ve run over the last couple of years which has gathered two or three thousand entrants each year.

Tracking the performance of the top 20 most picked stocks has revealed that the strong penchant for risk taking, encouraged during 2020’s Covid Rebound, has not paid off. The list contained only 8/20 winners - a 40% “hit rate”. Yes, this is a competition and people do select punts, but if the sentiment on Twitter is anything to go by then the –14.5% return may have been suffered by many. I’ve heard of some investors who have lost up to 90% in 2021 by following the crowd into highly discussed names at the top of the cycle. While the top 20 selected by the Stockopedia Subscriber community did do better (+6% YTD) there are many on the overall list that will be familiar to the community - BOO, SAGA, DDDD, AVCT, NCYT, SLP, ORPH, ECR, ODX, SYME, GGP, IAG, HZM, TILS, HZM, PHE, BMN, ODX, SNG, ARB.

We have taken the decision not to run the Stockopedia Challenge for 2022 for a variety of reasons linked to the above (we are likely to revisit it in a different format in future) - but if you do wish to monitor the general interests of private investors there are some alternatives. Paul Hill on Twitter has been running a poll which can be found here, and David Stredder will be launching another competition called the Mello BLISS with rules designed to avoid speculation. If you haven’t yet been to a Mello Monday webinar - I highly recommend it as you’ll discover amazing insights from the very best private investors and fund managers - you can learn more and sign up here.

Wu-Wei - The “Pooh Way”

I have mused on many occasions as to the benefits of rules based investing. But with all the distractions of markets, it can be very hard to stick to. My own personal performance has failed to keep up with the NAPS as I broke my own rules. At the start of 2020, I began Chairing the Stockopedia Staff Investment Club and started to enjoy stock picking (as opposed to systematic investing) again. After all, there’s nothing like a great story to give you confidence in your share picks.

James Montier once mused in a paper titled "An Ode To Quant:

The evidence is clear: quant models usually provide a ceiling from which we detract performance rather than a floor on which we can build performance.

Which certainly sums up my own experience in 2021. I’ve managed to take my own winning NAPS system and reduce its returns through meddling - taking a smaller number of higher conviction positions, attempting to time entries and exits, and ending up with a 17.6% return when 26%+ was on the table at lower volatility (and less emotional distraction). So I begin (again) the process of shifting back to a more systematic, and more boring, NAPS Portfolio.

But there are great benefits to being boring - or should I say - reducing effort. The Taoists call this “Wu-Wei” which is translated as “non-doing” and so often misinterpreted by slackers as a justification for laziness. But Wu-Wei is more accurately interpreted as “effortless action” - taking action to ensure you swim with the currents rather than against them.

As described in the Tao of Pooh…

Mistakes are made by man, the creature with the overloaded Brain who separates himself from the supporting network of natural laws by interfering and trying too hard.

My own belief, well supported by hundreds of years of financial history, is that there is a natural law of the stock market. Rewards accrue to those that patiently own better quality, reasonably valued, stronger momentum shares. These are the three factors around which the StockRanks are designed and which have continued to explain (and predict) stock market returns. It seems that the only thing that has ever really mattered in an equity portfolio is to maintain a well diversified exposure to quality, value and momentum shares and wait for the market to do its natural work.

Of course, the Eeyores out there will keep acquiring knowledge to Complain about the world, and expect it to end with the ultimate collapse of stock markets everywhere. Too much cheap money, too much inflation, too many zombie companies, the end of the interest rate cycle, too much government intervention. They will create doomsday portfolios with the conviction of being right eventually, which I’m sure they will be… eventually.

Meanwhile the Rabbits out there will keep acquiring knowledge in order to be Clever and stay “one step ahead” of everyone else. Darting from one investment to the next, getting over-excited about all of AIM’s more speculative investments, predicting the future of technology, energy and healthcare while exhausting themselves from the effort and wondering why they’re so often at the wrong end of a long shotgun.

“Rabbit’s clever,” said Pooh thoughtfully. “Yes”, said Piglet “Rabbit’s clever, and he has a Brain.” There was a long silence. “I suppose,” said Pooh “that’s why he never understands anything.”

As the book illustrates, it’s Pooh that seems to most embody the principles of Tao.

“But, Pooh,” cried Piglet, all excited, “do you know the way?” “No,” said Pooh. “But there are twelve pots of honey in my cupboard, and they’ve been calling to me for hours. I couldn’t hear them properly before, because Rabbit would talk, but if nobody says anything except those twelve pots, I think, Piglet, I shall know where they’re calling from. Come on.”

To me, those twelve pots of honey are the three simple factors that I forgot to hear due to the cacophony of opinions that people share about stocks.

So my New Year’s Resolution is to be less Rabbit, less Eeyore, and more Pooh.

The 2022 Portfolio

For the third year in succession we will be using very similar rules - outlined in some depth at the start of 2021. The portfolio is constructed by selecting 20 stocks from two pools. The first being the highest ranked turnarounds (according to their Value & Momentum using the VM Rank), the second being the highest ranked high flyers (according to their QM Rank). Forced diversification across 10 sectors helps manage risk, with only 1 selection in each of Utilities and Telecoms with a top up in two other sectors with the next highest ranked shares.

As usual, I don’t love the picks - but not loving the picks has always worked well as so often it’s the shares you loathe that turn out best. Who would have wanted to own Drax (LON:DRX) this time last year ? A utility which has broken many a heart over the years. But it’s appreciated by 63% over 2021 and brought great spine to the portfolio. This is why it’s imperative to maintain broad sector agnostic exposure in a portfolio - to ensure you are Less Wrong from year to year. Being Right is what many Wish to Be… but being Less Wrong is the Winning Strategy.

Here’s the list:

It’s notable that this list contains a few companies that may shy ESG minded readers away - two oil producers, a cigarette manufacturer and a palm oil producer. While I am a great believer in the power of ESG investing to change the world for the better, I’m also conscious that the weight of capital being driven into ESG funds is creating great distortions in financial markets and thus consumer’s lives. The forces of ESG have shot the price of gas to the moon which is a harbinger of more distortions to come - there is a growing worry that the oil price could do the same as underinvestment continues in these sectors. I do recommend reading Doomberg to understand more about the growing energy crisis. The NAPS process favours rational capital allocation and currently has no ESG bias - it may benefit from sector undervaluation that ESG is creating.

In previous years I’ve added constraints to favour small caps, but more recently I’ve been letting the ranks guide the distribution. This year’s portfolio is more weighted to mid and large caps, with only 4 small caps in the mix. I’m quite comfortable with this - the FTSE 100 has been outperforming over the last 12 months after all and that momentum may well continue. Similarly, I’ve relaxed the rules around excluding “Highly Speculative” shares. There are only 2 in the mix this year (Tullow Oil and Indivior) but they are mid caps and not at the extreme end of the risk spectrum. There are three shares with spreads around the 5% mark (REA, System1 and Somero), but the median spread is only 0.49% (average 1.44%). I generally find that good brokers can offer better execution than the quoted ask price so the spreads may be tighter than in our database.

The Stocks

Thanks again to Jack and Ben who have written up some briefs about the 2021 stocks for those who wish to know a little bit more.

Basic Materials

Hill & Smith Holdings (LON:HILS)

Hill & Smith is a FTSE 250 listed supplier of infrastructure and galvanising services around the world. Its products are found in flood defences, agricultural settings and highway crash barriers, among many others.

Its core markets are growing but like many others, Hill & Smith is having to manage the effects of supply chain pressures and higher input prices. In its favour, it has some solid quality characteristics, resilient profitability and momentum in both its earnings and share price.

In a trading update in November 2021, the company said: “The board remains confident in the medium to longer term outlook for the group, supported by strong growth drivers for both sustainable infrastructure and safe transport.”

Atalaya Mining (LON:ATYM)

Atalaya Mining, previously known as EMED Mining, acquired the ownership of the old Rio Tinto copper mining assets in the Pyrite Belt of Andalusia, North West of Seville. They have been ramping up production to hit new records of production and revenues and turning into an impressive outfit. Their main cash cow is the Proyecto Riotinto open pit mine but have also acquired the Masa Valverde nearby. They have been working through some community issues with their Proyecto Touro prospect in the NorthWest of Spain but a strong focus on ESG may help them replicate what they’ve done in Andalusia. This is a cheap copper miner, with a strong yield and no debt, exposed to the growing demand for copper in the electrical age. Dr Paul Jourdan at Amati has been building a position and explained his bullishness on a recent Moneyweek podcast.

CEO Alberto Lavandeira commented in November “I am pleased to report another strong quarter and year-to-date for Atalaya Mining. Robust operational performance, combined with strong copper prices, has seen our EBITDA for the first nine months of 2021 more than triple from the amount generated during the same period of 2020.”"

Consumer Cyclicals

System1 (LON:SYS1)

Formerly known as BrainJuicer, System1 is turning heads now for its shift away from bespoke advertising consultancy work to more scalable digital solutions (backed up by an ever-growing bank of proprietary advertising data). This move towards smaller and more automated solutions should lead to higher quality earnings and cash flow, as well as a more fundamentally profitable enterprise in future.

The shift to automated products is accelerating and represented 46% of revenue in Q2 (up from nothing in the prior year), which could signal a real incoming inflection point for the group. In the meantime, it is profitable, cash generative, has a strong balance sheet with a net cash position of £7.5m, and is buying back shares.

In its interim results released in November, founder and executive president John Kearon said: “*We believe that the growth in data revenues signals tangible progress towards our strategic goals, and that these revenues will in due course more than offset the expected reduction in bespoke consultancy projects as more companies adopt our automated data products.”

Watches Of Switzerland (LON:WOSG)

Watches of Switzerland is the UK market retailer of luxury watches and boasts long standing relationships with the likes of Rolex and Patek Phillipe. It traces its lineage back to the 18th century and hasn’t lost a partner in over 10 years. While brand owners typically retain a lot of economic value, WOSG plays an important role in providing routes to market, linking high end consumers to luxury watch owners.

The future looks bright for the group, which is leveraging its heritage and partnerships to kickstart its expansion into the lucrative US market. The impressive progress here has led to a rerating of the share price, but is the stock now too expensive?

In the group’s interim results released in December, management said: *“Through a consistent investment programme, we have further strengthened the business, paving the way for continued success as we advance our Long Range Plan objectives to strengthen our luxury watch leadership in the UK, become the clear market leader in the US and capitalise on the growth potential in the EU market.”

Vertu Motors (LON:VTU)

For so long, out of favour and offering asset-backed value, the auto dealer sector is now “in play” as a result of semiconductor shortages causing havoc with global car production. While there is less new car supply, used cars are selling at higher margins than previously. The net effect has been to catapult car dealer margins to historically high levels.

But for how long will these conditions persist, and what will normal levels of profitability look like on the other side? These are important questions, but for now bumper profits are filling up the coffers and transforming balance sheets.

In Vertu’s most recent trading update in December, it said: “The Board remains cautious on the future outlook with the potential of further disruption from Covid–19 to our resource levels, consumer confidence and global supply chains… the Board now anticipates that the Group’s adjusted profit before tax for the year ending 28 February 2022 will be no less than £70m (previously not less than £65.0m).”**

Consumer Defensives

R E A Holdings (LON:RE.)

R.E.A. is a UK-based palm oil producer with plantation operations in the province of East Kalimantan in Indonesia. Its origins date back to the early 1900s, when it was involved in overseas rubber plantations.

Improvements in the price of palm oil have fed through to R.E.A’s finances in 2021. As a result, there has been strong momentum in its share price. At current levels, the stock still looks cheap across a range of measures. While environmental groups aren’t keen on palm oil development in Indonesia, R.E.A. does provide extensive documentation, including external assessments, of its environmental and social commitments.

In its interim results in September, the company noted: “[A]… favourable combination of circumstances provides an opportunity to place the group’s finances on a firmer footing and, if, as the group expects, CPO and CPKO prices remain at remunerative levels, the group can look forward to a period of prosperity.”

Imperial Brands (LON:IMB)

Imperial Brands (previously Imperial Tobacco) was one of the great contrarian winners for Woodford in his early years as the addiction to tobacco products proved ever profitable in spite of advertising and regulatory restrictions. But since 2016 the stock has suffered, especially due to ESG concerns, market share losses and a lack of growth. But the company has a revamped strategy & leadership and is focusing on a smaller group of priority markets, while developing its heated tobacco and vape products as the shift away from combustibles continues. As a large cap giant with £8bn in revenue from 120 markets and a huge 9% dividend forecast it is likely to remain a mainstay of pension portfolios for some time to come.

CEO Stefan Bomhard commented in November at Final Results "This has been a year of important progress and significant change, as we begin to deliver on the new, focused strategy we announced in January 2021…. The year ahead will complete the two-year strengthening phase.. this period builds the foundations for the subsequent three-year phase, which focuses on the acceleration of returns and sustainable growth in shareholder value.

Energy

Bp (LON:BP.)

Shares in the oil and gas giant BP have drifted in a narrow range since the Covid crash in early 2020. That year, an oil price war between producing nations quickly gave way to one of the biggest declines in global consumption since the second world war.

Since then, demand has risen on the back of an improving economic outlook. Meanwhile, BP is endeavouring to transform its business and become a renewable energy generator, but the market seems unsure. BP’s shares trade on a single figure forward PE despite it being on course to record bumper profits in 2021.

In a third quarter update in November, Bernard Looney, the CEO of BP, said: *“This has been another good quarter for BP - our businesses are generating strong underlying earnings and cash flow while maintaining their focus on safe and reliable operations.”

Tullow Oil (LON:TLW)

Tullow Oil is an oil & gas exploration and production group primarily focused in Africa and South America. Its production guidance for the current year is in the range of 58,000–61,000 barrels of oil equivalent per day.

Like a number of profitable stocks in this sector, Tullow continues to look cheap across multiple metrics despite solid appreciation in the share price over the past year. It refinanced its debt facilities in the first half of 2021, but at ~US$3.8bn (TTM), that debt is considerable, meaning that Tullow’s outlook is very dependent on oil and gas prices.

In a trading statement in November 2021, Rahul Dhir, the CEO of Tullow Oil, said: “We have delivered strong operational performance across both Jubilee and TEN [production fields] this year and the Ghana drilling programme continues to be successful.”

Yellow Cake (LON:YCA)

Yellow Cake is maintained in the NAPS from 2021. Yellow Cake was incorporated in 2018 on the view that uranium is structurally undervalued and aims to hold physical U3O8. It offers direct exposure to the uranium price which may prove profitable, given the nuclear sector appears set for a revival given its emissions free clean energy capability. In the USA, the Sprott Physical Uranium Trust has been grabbing some headlines as it appears to try to corner the market in Uranium. There are some players who believe the price of Uranium could spike dramatically as underinvestment in new supply meets growing demand and Yellow Cake is a way to play this. Shareholders should understand that the company is likely to continue issuing shares to acquire uranium. An extensive write up of YCA can be found here by Jack.

Andre Liebenberg, CEO of Yellow Cake, said in December at interims“The demand side of uranium is strong and growing, yet considerable supply constraints remain. We continue to have real confidence in our business model, our strategy and our investment case.”"

Financials

Liontrust Asset Management (LON:LIO)

Liontrust Asset Management has been a stellar performer for shareholders over the last decade - with a share price growing from 90p in 2010 to 2200p today. This kind of share price growth can give shareholders vertigo but the company appears reasonably valued at a PE of 17 for its prospective earnings growth of 26%. At interims in September, the company reported Assets under Management (AUM) of £36bn - an increase of 15% since the start of the year and inflows of £2.1bn +19%. The group continues to win awards and positions itself strongly to retail investors with a strong focus on video production and website traffic.

Alastair Barbour - non exec Chairman - stated at the interims in September “ The last six months has demonstrated the strength of Liontrust across the business. This includes the quality of our investment capability, breadth of our client base, strong sales and client service, great communications, distinct brand and robust infrastructure. As a result, the Board are confident about the continued growth of your Company over the coming months.”

Natwest (LON:NWG)

As well as personal banking, NatWest is the largest business and commercial bank in the UK. Its share price has largely recovered from the Covid market crash and, operationally, the group is reporting positive momentum in the current 2021 year.

While banks can be notoriously complicated and hard to value, the forecast yield of 4.6% is below average for the sector. Meanwhile, momentum in its share price and earnings forecasts is positive.

In a third quarter update, Alison Rose, the CEO of NatWest said: “Throughout Q3 2021, NatWest continued to deliver a strong operating performance; growing in key areas and accelerating our digital transformation to improve customer experience and make our business more efficient.”

Healthcare

Indivior (LON:INDV)

Indivior has been on a journey since listing back in 2014. Shares reached a high of nearly 500p before cratering to a low of around 34p. Today, they trade for 247p after a strong run that has seen the stock comfortably outperform the rest of the market with a 1 year relative strength measure of some +126%.

Much of this outperformance comes down to the group’s legacy business holding market share well against generic competition, while its new treatment comes to the fore. Litigation has been an issue for the group but progress has been made here. It continues to weigh on sentiment, however, which could prove to be an opportunity. The company continues to divide opinion, but the stock itself has rarely looked better value when balancing the price against future prospects, and presents itself as a prime takeover candidate.

The group said in its Q3 results, released in October: “We are pleased to report another quarter of good growth and further strengthening of our leadership in addiction treatment.”

Dechra Pharmaceuticals (LON:DPH)

Dechra Pharmaceuticals is a specialist in veterinary medicines. It claims that the majority of its products treat conditions where there is either no viable alternative or its products have clear advantages. Dechra was a Covid winner, with many of its main markets growing strongly through the crisis.

Shares in the company performed exceptionally well through 2021 as its financial performance accelerated - and that was reflected in regular earnings forecast upgrades. The stock looks expensive but Dechra’s growth is expected to continue.

In its full year results published last September, Ian Page, the CEO of Dechra, said: “Dechra has continued to outperform a robust market throughout the Covid–19 pandemic affected financial year. As we start the new financial year trading remains strong with the momentum and market penetration seen in the second half of the prior financial year continuing.”

Industrials

Robert Walters (LON:RWA)

Labour shortages and wage inflation abound heading into 2022, and Robert Walters has been benefitting with a series of profit upgrades. The stock has rerated and is close to all-time highs but, given the favourable recruiting backdrop across a number of countries, the near-term outlook continues to look positive. Broker estimates have been behind the curve for much of the past year.

This is a fundamentally well run recruiter, but these stocks are often the first to rebound in a cycle. Is this a peak valuation? Reports suggest wage inflation might be here for a while longer and it could well be that there is further to run here. Certainly, from a factor perspective, the stock has merit at these levels.

In its recent trading update in December, the group commented: “…as a result of strong trading across all regions in the first two months of the fourth quarter and improved visibility in respect of December trading, profit before tax for the full year ending 31 December 2021 is expected to be comfortably ahead of current market expectations.”

Somero Enterprises Inc (LON:SOM)

Somero is a perennial Super Stock whose market-leading position in the niche supply of vehicles and equipment in the construction of flat floors for automated warehouses has enabled it to generate enviable returns on capital over time (regularly in excess of 40%). While its overseas adventures have been slightly more hit and miss, its core business goes from strength to strength and expansion into India signals a promising opportunity to bring its clever products to a new, large market. What’s more, trading on just 11.1x forecast earnings, the valuation is hardly demanding for a proven quality operator.

In its most recent update, the group commented: “The Board is pleased to report that it has seen strong trading momentum continue throughout H2 2021. This, combined with the Company’s ability to consistently deliver on customer orders, means that the Company now expects to exceed previous guidance for FY 2021.”

Technology

Focusrite (LON:TUNE)

Focusrite is an owner-managed audio and music products specialist that has developed rapidly as a result of strong organic growth and some strategic acquisitions. It has a solid, conservatively managed balance sheet and a strong track record of sales and earnings growth.

It has some eye-catching operating margins of around 20% and nearly 40% return on capital employed. This is a popular stock and the valuation looks high, but its strong quality metrics are reassuring. There may be concerns that Focusrite has seen a temporary sales surge due to the pandemic.

In a trading update in December, Phil Dudderidge, the executive chairman of Focusrite said: “During the first quarter of the current financial year, demand has remained strong overall and revenues have been in-line with management expectations.”

Fdm (holdings) (LON:FDM)

FDM is a group that essentially provides “outsourced IT help”. It recruits, trains and deploys its own permanent IT and business consultants to clients, either on site or remotely.

The group boasts some solid, double-digit margins and consistent profitability despite the turmoil of the past couple of years. Value investors won’t like the expensive rating but FDM is expected to bounce back to its pre-Covid growth trend this year.

In its half year results last July, Rod Flavell, the CEO of FDM said: "I am pleased to report that FDM made strong progress in the first half of the year and, while our markets remain impacted by the pandemic, we have seen operational performance return to levels that we experienced prior to the pandemic.”

Telecoms

Airtel Africa (LON:AAF)

Airtel Africa has two very different businesses: more traditional telecoms infrastructure operations across 17 African nations, and a lower capex, higher margin Mobile Money proposition that seeks to bring accessible finances to the continent’s “unbanked”. The latter has attracted notable global partners including MasterCard, suggesting Airtel Money could have a big future as part of the African financial system.

Compared to more UK-focused stocks, there are powerful demographic tailwinds in countries such as Nigeria that should make long-term growth more achievable. But there are, of course, geopolitical risks too. A price to forecast earnings ratio of 10.7x appears reasonable once you balance the risks against the rewards.

In Airtel’s recent H1 results, incoming CEO Segun Ogunsanya said: “ The first half of last year, and especially Q1, was impacted by the start of Covid, but even after adjusting for these effects, our revenue growth rates for the half year for the Group and all our service segments are ahead of our FY’21 revenue growth trends, and in reported terms these are all in strong double digits.”

Utilities

Centrica (LON:CNA)

2021 was a tumultuous year for the UK energy supply industry. Soaring gas prices forced several small suppliers out of business, which was a bonus for groups like Centrica, which owns British Gas. In a highly regulated industry, rising wholesale prices can’t always be passed on to customers. But this year there’s an expectation that regulators will raise industry price caps, which should boost profitability for Centrica.

Shares in the group have already risen in anticipation of higher profits, and brokers have hiked their earnings forecasts. Price caps are undoubtedly a drag on margins, but those strict controls are partly why utilities companies are often maligned by the market - and valued cheaply as a result.

In its interim results last July, Chris O’Shea, the CEO of Centrica, said: “Our first half financial performance was broadly as we expected overall, and we continue to make good progress towards the simplification of our company.”