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Neil Woodford: 5 stocks I bought with Tesco money
Star fund manager Neil Woodford has revealed how he recycled the money from dumping Tesco from the Edinburgh Investment Trust.
The full-year results from the £900 million Edinburgh investment trust today give an insight into how Neil Woodford, the fund’s Citywire A-rated manager, used the proceeds from selling his stake in Tesco (TSCO.L) following its shock profits warning in January.
According to the trust’s previous results Woodford held 3.4% of Edinburgh in Tesco at the end of last September. Following the profits warning Woodford decided he had:
‘placed too much confidence in business’s ability to cope with the economic headwinds and also that some of the company’s investment decisions of recent years have not created the value originally envisaged. For example, the building of much bigger stores to cope with an expanding product range has coincided with a boom in internet shopping.’
Woodford’s response was to reinvest the money into the pharmaceutical sector, where he already has a quarter of the fund invested, and five other stocks he knew well. Here we look at those five companies.
The repair and insurance group has had a difficult time since October when news of its issues with mis-selling policies first appeared. Last month the Financial Services Authority confirmed it would investigate the company’s telesales operation.
Although Homeserve (HSV.L) shares have fallen 72% over a year, Woodford, who is a long-term investor in the company, has held on and says he took advantage of ‘share price weakness’ top buy some more. At just 0.5% of the fund Homeserve ranks 37th in the 42-strong portfolio. However, Invesco Perpetual as a whole owns nearly 21% of the £458 million company.
The mis-selling scandal has seen 300,000 customers desert Homeserve, which will hit future profits and cast a shadow over its international growth ambitions. However, there are signs that investors, other than Woodford, may be willing to back the chief executive Richard Harpin’s plan ‘to get back to a high quality, lower customer number business from which the UK management team can start growing again’.
M&G has been a big buyer of the shares recently and now owns over 5.5% of Homeserve. Franklin Templeton, the well-known value investor, had taken a similar stake recently although it has recently dipped below 5% since the FSA confirmed its investigation.
Analysts are warming to the stock too. On 25 May Seymour Pierce upgraded Homserve to ‘hold’ from reduce although it lowered the price target to 200p from 220p. Brewin Dolphin also upgraded to hold from ‘sell’ with a 150p target brought down from 250p. Other analysts remain neutral.
According to Reuters data the shares yield 9% with dividend cover of 2.5 times and trade at 5 times estimated earnings for this year.
Defence contractor Chemring (CHG.L) is another stock Woodford has increased Edinburgh’s position in as its shares, down 21% year to date, have struggled in response to contract delays caused by military spending cuts in the US and Europe. However, a trading statement a month ago provided some reassurance when the company said it had secured all five orders it had identified as key for this year.
Edinburgh bought into Chemring in the first quarter and by the end of March had 0.6% of the trust in the stock, ranking it 29th in the portfolio. Woodford was already a big holder of the fund in his £9 billion Income and £11 billion High Income funds, giving his firm through its other funds an overall 28% stake in March.
More about this:
Look up the funds
Look up the shares
- Invesco Income Growth Trust PLC
- Smith & Nephew PLC
- Serco Group PLC
- GlaxoSmithKline PLC
- Homeserve PLC (HSV.L)
- Chemring Group PLC (CHG.L)
- Tesco PLC (TSCO.L)
Look up the investment trusts
Look up the fund managers
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- Woodford: Tesco's woes run deeper than the consumer squeeze
- Big Price Drop leaves Tesco investors reeling
- Tesco: the funds that held the battered stock
- Warren Buffett buys more shares in battered Tesco
- Citywire Top Stocks
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