4 Ugly Duckling London Stocks

07/27/2012 11:00 am EST

Focus: GLOBAL

When analysts form a quorum on a company these days, it means boundless headroom or a nightmarish, endless fall for the stocks in questio. The quartet below are technically ugly ducklings, but there may be a swan or two in the set, observes the staff of Motley Fool UK.

Upgrades (and downgrades) from City analysts can move UK share prices significantly. All shares can be affected, from small caps through to FTSE-100 blue chips. Institutional fund managers often follow the analysts' advice, buying and selling shares accordingly.

The consensus analyst recommendation is therefore a good proxy for market sentiment as a whole. Understanding how bullish or bearish the market is feeling towards a share can help investors appraise the price the share might reach if sentiment turns.

I trawled the market to find shares where the consensus analyst recommendation was on the wrong side of "Hold." Four shares look particularly interesting to me.

PZ Cussons (London: PZC)
Detergent and personal hygiene company PZ Cussons is a surprise name on the list. While the company has warned on profits recently, it remains one of the most successful companies on the market today.

PZ Cussons owns a number of high-profile home brands, including Imperial Leather, Carex, and Morning Fresh. The company's history can be traced back to the late 19th century, and West Africa remains a key market for the company today. PZ Cussons first opened an office in Nigeria in 1899.

What is causing analysts to suggest the shares should be sold? Recent trading statements from the company have confirmed the damage being done by rising costs and strife in Nigeria.

However, PZ Cussons has a formidable dividend record. The company's payout to shareholders has increased year-on-year for more than 25 years. Unfortunately for income investors, PZ Cussons' dividend today equates to a prospective yield of just 2.1%.

At today's price, PZ Cussons trades on a forward P/E of 25. That's a big rating for a company where analysts expect profits to decline by 15% this year.

Drax (London: DRX)
Drax owns and operates the Yorkshire power station of the same name. The company generates 7% of Britain's electricity.

On the face of it, this share should be able to deliver reliable earnings and dividends. However, in the last five years, the company's fortunes have varied considerably. While net profit for the last year hit £465 million, that figure is expected to drop substantially over the next two years. In 2009, net profit fell to just £11 million.

When investors and analysts cannot forecast future earnings to a satisfactory level of certainty, they will often mark the shares down.

Drax currently has plans to become a renewable energy provider by burning biomass. The profit the company will make from such activities depends on the level of subsidies the government is willing to provide—and currently this is undecided. As a result, many analysts are sitting on the fence, unwilling to recommend a trade on a company with somewhat uncertain earnings.

Schroders (London: SDR)
Fund manager Schroders is a blue-chip investment group with a strong position in its chosen markets. The company today trades on a P/E rating of 13.2 times consensus estimates for 2012. The shares are expected to yield 2.9%.

Schroders is a typically cyclical business. When stock markets are performing well, Schroders shares do likewise. In tougher times, shareholders can be left nursing losses. For 2009, Schroders reported profits at half the level they were before the financial crisis. Earnings recovered sharply in 2010, more than doubling to 107p per share.

Schroder's dividend, while not huge, has been dependable. The company has not cut its annual dividend to shareholders since 1999. In 2006, Schroders paid 25p per share of dividends. The most recent dividend came in at 39p per share—equivalent to a 9.3% rise year-over-year.

Analysts expect Schroders' earnings to decline 8% this year to 104p per share. Growth is forecast to return in 2013, with earnings hitting 116p per share. Those estimates put the company on a forward P/E of 13.2 for 2012, falling to 11.8 for 2013.

Admiral Group (London: ADM)
Admiral Group is a massive success story. From its formation in 1993, Admiral now employs more than 4,500 people and boasts a market capitalization of £3.1 billion.

Admiral is the company behind the eponymous car insurance brand. The company also owns elephant.co.uk and insurance price-comparison Web site confused.com.

Earlier in the year, Admiral shares declined significantly when the company announced an increase in sales but flat revenue per vehicle statistics. The numbers spooked investors into thinking Admiral's growth had ended. There has also been a series of statements from hedge funds, declaring an increase in their bets that the share price will fall.

Admiral is expected to deliver a large dividend rise for 2012. Based on analyst forecasts, this puts the shares on a prospective yield of 7.2%. On consensus forecasts, Admiral trades on a P/E of 12.7 for 2012. That's not expensive for a successful blue-chip.

Read more from the Motley Fool UK here...

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