- Some momentum stocks still aren't expensive
- Others are quality compounders with tailwinds
Barclays (BARC) tops our UK large-cap earnings upgrade momentum screen. Analysts have raised their expectations of earnings per share for the full years ending December 2024 and December 2025 by an average of 11 per cent compared to their views one year ago. The improving sentiment has in part been driven by better performance reported at the mid-year stage by Barclays’ investment banking arm. There is of course great uncertainty for the world economy in the coming months, especially if president-elect Trump’s policies prove inflationary and increase the chance of a no-landing scenario (higher interest rates for longer).
In Britain the jury is out on the chancellor’s budget and if controversial energy policies and an unaccommodating stance towards farmers comes back to bite, inflation could well be a theme into the second half of the decade. For banks that’s a mixed bag, as the inevitable higher rates are an opportunity to maintain a wider margin on lending, but then fewer loans get written. Nonetheless, valued at just six and a half times next twelve months’ expected earnings per share, Barclays shares still offer a decent risk premium.
A segment of the global economy where there is no equivocation on the desire to see lower interest rates is the private equity industry. The UK’s largest listed investment company that focuses on private equity is 3i Group (III). It also passes all our tests and has a relatively low 12-mth forward price-to-earnings ratio. If this reflects ongoing uncertainty about the direction of interest rates, reassurance is provided by the continued positive performance of 3i’s investment portfolio. Its large investment in European retail group, Action, continues to bear fruit in terms of the holding growing Ebitda (earnings, before interest, tax, depreciation and amortisation). Furthermore, in recent half-year numbers, 3i reported 94 per cent of its private equity holdings had grown profits in the 12 months to 30 June 2024.
The other UK large-cap companies which pass all of our screen tests are Rolls-Royce (RR.) and Diploma (DPLM). In the case of Rolls-Royce, the scale of upgrade momentum may make it harder to positively surprise the market looking forward.
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