Three stocks to watch this week

Find out why gas producers, Deliveroo are on our radar this week.

At the end of last week, we saw UK stocks rise above 7,000, a momentous day for the market and the first time that the FTSE 100 has risen above this level since February 2020. We expect further gains for the FTSE 100, for as long as value stocks – those linked to the “old” economy, continue to dominate momentum indicators. This is a big reversal from the major trend of 2020, where growth stocks massively out-performed value stocks. However, when it comes to growth sectors, such as bricks and mortar retail, energy companies and airlines, it looks like there is life in the old dog yet. Below are three stocks that we think are worth watching out for in the week ahead. 

Gas producers

It was meant to be a crunch week for the world’s gas producers as the EU was poised to classify gas produced by fossil fuels as a green energy. The classification was to be included in a document that was due to be released later this week that informs investors about environmentally friendly investments and is seen to be a more accurate assessment of a company’s green credentials compared with how some companies report their own green credentials, which has led to multiple accusations of green washing by some of Europe’s largest corporate names. Thus, as you can see, inclusion in this report is a boon in an era where investors – both institutional and retail alike – are jumping on board the trend for ESG investing. There are many countries inside the EU who want gas to be included as a green investment, as they see it as a sustainable way to reduce their emissions in the coming years. Likewise, France and the Czech Republic also want nuclear energy to be included in the draft of the document that will be sent to EU governments and to the EU parliament, who have the power of veto and could block the draft of the document.

The problem is that there is huge pressure on Brussels from environmental groups to resist the document since they believe that it amounts to greenwashing, which is ironic since this is what the document is trying to avoid, since gas and nuclear energy are not from sustainable sources. Shell and BP are the world’s 4^th and 6^thlargest gas producers respectively, so this may explain why both of their share prices were down at the end of last week to the tune of 1%, even though their peers in the value sector have seen their stock prices rise. If gas is excluded from the document this would be a big blow to the likes of BP and Shell, as inclusion in the document could have seen millions of dollars’ worth of green-minded investors buy their stock in the coming months. Thus, if you are looking to purchase these large energy producers in the coming months, keep an eye out for the EU’s decision relating to this document. 

Deliveroo 

It seems like Deliveroo can do nothing right. They issue a fantastic trading update at the end of last week, and the share price is still wallowing at its lowest level since falling a third from last month’s IPO price. Partly this is because the IPO was too richly valued, partly this is because they have a lot of work to do to win over the market, as its CEO mentioned last week. The number of orders were up more than 100% on last year and gross transaction value has increased by 130% YoY, to more than £1.65bn. The UK is a tough audience when it comes to tech stocks, so it seems. Considering some have been looking for big tech IPOs to list in the UK for years, why has there not been greater investor interest, especially when the numbers look this good? The oft stated reasons are linked to regulatory concerns, especially around the treatment of staff, competition and what happens to online food delivery companies once we fully exit lockdown, which hopefully won’t be too far away. The latter two concerns are worth considering, however the first is a little bit difficult for us to buy here at Minerva. Concerns about staff treatment is a legitimate and ethical concern, however, it hasn’t stopped Amazon’s share price from soaring while it also has deeply concerning issues relating to how its treats its staff. Thus, is the UK confirming itself as a moderately hostile environment for tech? This is something that economists and analysts will analyse to death in the coming months and years.  The latter two concerns – competition and the end of lockdown are also worth revising. Competition in the sector is strong, Just Eat and Uber are eating away at market share. However, the explosion of online options for digital consumers suggests that there is room for Deliveroo to continue to grow in the long term. While we expect there to be a fall in sales growth and GTV in the coming months, as countries emerge from long lockdowns and revel in socialising again, we still think that ordering takeout that comes straight to your door is a luxury few will live without. Added to this, if Deliveroo could include a premium service, with food from premium outlets, then they could boost their future customer base. Unfortunately for the UK stock market, we think that Deliveroo would have performed better if it had debuted in the US, compared to the UK, and we hope that its performance won’t put off future tech listings in this country. Eventually, investors will get on board with Deliveroo, but maybe not until the environment is better; by this we mean more clarity on what happens to online food delivery services once lockdowns end and when bond yields stabilise, since the recent rise in global sovereign yields is not good for tech stocks, especially rookie ones like Deliveroo. 

Can Primark rise from the ashes? 

Not having an online presence has hit the bottom line of Primark owner, Associated British Foods, incredibly hard this year, although its stock price has held up well. It will update investors on Tuesday and is expected to say that it missed out on sales of $1.1bn in the 6-months to February this year. It’s almost unforgivable that Primark did not manage to create an online presence over the past year, since it must have known that a wave of digitalisation was coming. However, it believes that its cheap, low margin products do not work for profitability in an online environment. Let’s hope that the exec team are right. The first test will be indicative trading results for the first week since non-essential retail re-opened on 12^th April. Anecdotally, it appears that Primark will have done well, with long queues noted at their stores. It is also expected to announce sales of £2.2bn in the 6 months to the end of February, which is a sharp slump from £3.7bn that it posted a year ago. Those who watch ABF’s share price will know that it has weakened slightly this month, with a 1.25% decline on Friday. We could see further stock price weakness into the results. But overall Primark and ABF’s other food brands are extremely cash generative, and the business is well run by management. Thus, we expect it to announce expectations of sales to bounce back strongly at Primark and for sales volumes to grow more than they did in pre-pandemic years, as pent-up demand is released. This should keep the stock price buoyant as we head into the rest of next week.