Five last-minute share ideas for your Isa

Nick Hyett, equity analyst at Hargreaves Lansdown, takes an in depth look at some stocks worth considering when making investments for your Isa.

It’s looking more and more likely that we’re past the worst of the pandemic. 

That means some of these picks are a little more adventurous than you might expect. 

As the tide starts to turn, we think now could be the time to consider dipping your toe in some uncharted waters. 

That said, there’s space for some bread-and-butter stocks in every portfolio. 

Companies with more reliable revenue streams could be a good idea for investors nervous about the shape and speed of our economic recovery, and also act as a great way to diversify riskier assets.

Investors need to act soon to make sure they secure this year’s Isa allowance, because the deadline is looming on 5 April. 

However, the Isa rules are pretty accommodating for anyone who doesn’t have time to decide where to invest their last-minute picks. As long as you put the money into an Isa by midnight on 5 April, you can decide where to invest it later and it will still count towards this year’s allowance.

That also helps if you don’t want to put all your Isa into the market in one go, as you can drip feed it in at your convenience.

1. Anglo American

One of the world’s largest miners, Anglo has a portfolio ranging from an 85 per cent stake in De Beers diamonds to iron ore, platinum, nickel and manganese. 

Mining is a cyclical business. During a boom construction and manufacturing increase, and demand for commodities rises. But when economies struggle demand can nosedive, seriously denting miners’ profits. 

Miners’ fixed costs are high, but once those are covered each additional sale is far more profitable. 

That’s great news when things are going well, but also means profits can fall faster than revenues if things go into reverse. 

Anglo American has tried to reduce the ups and downs in its portfolio by focusing on ‘consumer driven’ commodities. Platinum and diamonds fit into that category, as does copper, nickel and manganese which are crucial to many consumer electronics including electric cars. 

Consumer spending tends to be more resilient in a downturn, and steadily increasing global consumption offers a long-term tailwind.

As part of its strategy, Anglo has a major new copper mine in Peru due to begin production in 2022, and also bought out the former Sirius Minerals fertiliser mine in Yorkshire. 

The group plans to dispose of its remaining thermal coal assets by the end of the year, helping to reduce cyclicality while also improving its environmental, social, and corporate governance, or ESG credentials. 

Meanwhile, massive government spending and low interest rates have got many investors worried that inflation could pick up this year. That would be good news for miners. 

The value of the commodities they produce rises in line with inflation, but the debts they used to buy and build the mines remains relatively fixed. We think there’s a lot to like at Anglo. 

A balance sheet with less than one times net debt to cash profits, diverse commodity exposure and potential for rising commodity prices all play in the group’s favour. 

A price to book value (share price to net assets ratio) of 1.4 is lower than that of major UK-listed peers, and there’s a 4.2 per cent prospective dividend yield on offer. Remember though that even the consumer focus won’t make Anglo immune to a commodity slump.

2. Facebook

Despite its recent clashes with regulators, we can’t knock Facebook’s 3.3billion monthly active users and its formidable competitive position across multiple apps. 

That makes it irresistible to advertisers – and Facebook is basically an advertising business. Ads accounted for 98 per cent of revenue last year, most of which comes from Facebook itself. 

And while the core business carries on, there’s big growth potential as the group looks to monetise WhatsApp and Messenger. New products and ever-increasing scale don’t come cheap though. Capital investment has spiked from under $2billion in 2014 to over $15billion today.

Most of that’s going on data centres, servers and network infrastructure – creating barriers to entry for those after a piece of Facebook’s pie. 

Even with those extra costs, the group churned out $23billion in free cash last year. 

And its fourth quarter results showed a 33 per cent increase in revenue and a 53 per cent increase in profits. 

Both of the latter were ahead of market expectations. In a year where advertising spending came under pressure due to the pandemic that’s pretty impressive, and shows how much advertisers value Facebook’s services. 

And yet, the group’s price earnings ratio has fallen from 26.9 to 22.5, both well below the long run average. Take out the $62billion in cash sitting on the balance sheet and the valuation starts to look even less demanding.

However, Facebook is increasingly becoming a target for politicians. The group faces regulatory pressure over the unsavoury content users post and its influence on elections. 

What’s more, competition regulators are circling, and will perhaps threaten to break up the group or levy a large fine. While this would be regrettable, if Facebook, WhatsApp and Instagram get split up we think investors are likely to be left with three smaller, but still great, businesses.

3. National Grid

Utilities like National Grid have tended to be boring but reliable investments. They’re essentially government-regulated monopolies with great income visibility. 

National Grid owns the electricity grids across the UK and parts of the US. Since keeping the lights on is a necessity for most people, that equals very predictable demand. 

Regulators dictate how much revenue the group can collect each year. When revenue comes in below expectations, NG can make that up by collecting more from its customers in the future. 

But if it collects more than allowed, it must return that cash to customers via savings in the years to come. 

That translates into steady, predictable income. Plans to acquire Western Power Distribution and sell a majority stake in National Grid Gas will increase the weighting of NG’s UK electricity exposure to 70 per cent from 60 per cent. 

Becoming more heavily weighted to electricity is a strategy we admire as we shift to a lower-carbon world. 

The deal still needs to be approved by regulators, who already have some concerns about NG’s UK dominance, and it’s important timings go to plan. NG’s credit rating could be affected otherwise.

So what’s the appeal of a company whose revenue is at the mercy of regulators? First of all, there’s the dividend. 

Over the past five years National Grid’s share price has lost ground. 

But the group’s 6 per cent dividend yield meant total returns (reinvesting any dividends) were 8.5 per cent. Remember though that yields are variable, not guaranteed and are not a reliable indicator of future income. 

Because utilities have such a predictable income, their dividends have tended to be relatively reliable, although no dividend is ever guaranteed. 

NG offers some shelter against inflation. The group has pledged to grow its per-share dividend at least in line with the UK Retail Price Index for the foreseeable future. 

There are some growth opportunities as well. The profit the group’s allowed to make is based on the money it invests in the grid. 

Much of its infrastructure will need updating soon to reflect things like the introduction of electric cars, and that opens the door to further investment and higher profits. 

Put reliable profits together with some growth opportunities and we think NG stands out in the utility space.

4. Sanne Group

The company specialises in providing administration services to alternative asset managers, business that accounted for well over 90 per cent of total revenue in the first half of 2020. 

Alternative assets include commodities, collectibles, foreign currency, real estate and derivatives, among other things. 

Sanne’s customers therefore include hedge, real estate and private equity funds, with the firm providing back-office support across a range of functions stretching from regulatory reporting to transaction management. 

Once a fund is established, changing administrator is sufficiently complex to be essentially impossible, making much of Sanne’s revenue very sticky. 

As a market, ‘alternative asset’ funds have several particular attractions. They have enjoyed a boom in a low interest rate world as investors look beyond traditional investments in the hunt for returns.

An increasing number of these funds are seeking Sanne’s services to deal with regulatory complexity as they outsource back office functions to focus on value adding investment activities. 

Those trends have underpinned average annual revenue growth of 38 per cent since the group listed in 2015. Future growth expectations are more modest, but we see scope for profit margin improvement after a recent slump from the low 30s to high 20s. High single digit revenue growth together with margin potential bodes well for future profits. 

Margin growth relies on Sanne keeping rivals at bay – which might otherwise poach clients, staff or introduce aggressive price competition.

In Sanne’s favour here is its fundamentally niche market as well as the group’s size and international footprint. Offices across North America, Europe and Asia give it the in-market expertise to handle the increasingly cross-border nature of fund investors and flows. 

The shares currently trade on a price earnings ratio of 20.4 times earnings, below the long run average, but by no means cheap. There is a 2.6 per cent prospective dividend yield on offer, but still the group will have to grow if it’s to deliver for investors.

5. Tesco

We think Tesco’s core attractions and growth opportunities remain very much intact as the pandemic subsides. You might be thinking, ‘how does a retail giant as big as Tesco grow’? 

The answer is online shopping. A store footprint of around 3,800 (UK and Ireland) puts it in a strong position to capitalise on the long-term digital shift sparked by the coronavirus. 

Some 25 UK urban fulfilment centres are expected to open in the next three years, and online capacity is set to double to three million delivery slots a week. Seven million orders were delivered over Christmas 2020, and online orders shot up over 80 per cent in the third quarter. 

This opportunity sits on top of an already thriving store business. The pandemic hasn’t done anything to deflate Tesco’s dominant market share. It also hasn’t distracted from other efforts. 

The group recently completed a plan to rebuild operating margins, up from 1.8 per cent in 2016 to 4.6 per cent in 2020. 

It’s also sold less compelling overseas businesses, making the path to revenue and profit growth smoother. And, as a leading supermarket, some revenue should be reliable. We’ll always need to eat.

This helps underpin Tesco’s ability to pay reliable dividends. The dividend yield is a market-beating 4.9 per cent. (Remember, no dividend is guaranteed.) Revenues are being further supported by an improved pricing proposition. 

But pricing pressure remains an industry-wide issue. Consumers always want more for less, and the recent sale of Asda raises the possibility of another profit margin-diluting price war. The coronavirus pandemic has also increased costs, including permanently hiring 16,000 new employees. 

Operating profits are expected to be 37.4 per cent lower this year. Tesco is primed to make the most of the shift to online, while the store businesses keep simmering away. Reliability is something of a rarity in today’s stock markets, and with a price earnings ratio of 10.2 that makes Tesco stand out.

Please note that Hargreaves Lansdown’s non-executive chair is also a non-executive director at Tesco.