After a long wait, the third quarter saw both the UK and US get their first round of interest rate cuts. Stock markets have reacted positively since, with US markets reaching record highs and UK markets flirting with previous records.
Inflation is generally healthier than at the start of the year, but it’s still too early to declare a victory by the global policy setters.
Chinese markets also surged on the back of the central bank’s bumper stimulus plans, posting their best week since 2008. Investors will hope this sets the stage for a long-awaited revival in the world’s second-largest economy.
The race for the White House got a shock in July, when President Joe Biden stepped aside in the election race. His successor, Kamala Harris, currently sits just ahead of Donald Trump in the national polls.
With each candidate's policies likely to create opportunities and challenges for different sectors, there’s a lot riding on the election outcome in November.
Until then, the uncertainty is likely to lead to increased volatility.
Here’s how things are looking for our five shares to watch at the end of the third quarter.
This article isn’t personal advice. Investments and any income from them can fall as well as rise in value, so you could get back less than you invest. If you’re not sure if an investment is right for you, seek advice. Past performance isn’t a guide to future returns. Yields are variable and not a reliable guide to future income – remember, no shareholder returns are guaranteed.
Investing in individual companies isn’t right for everyone. Our five shares to watch are for people who understand the increased risks of investing in individual shares. If the company fails, you risk losing your whole investment. You should make sure you understand the companies you’re investing in, their specific risks, and make sure any shares you own are held as part of a diversified portfolio.
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Baker Hughes
Baker Hughes’ second quarter growth moved up a gear by most key measures.
Revenues were up 13% to $7.1bn, driven largely by sales of gas technology equipment. Underlying cash profit (EBITDA) grew by an impressive 25% to $1.1bn, reflecting the increased revenue and disciplined cost management.
Order levels resumed their upward path, growing 15% to $7.5bn. Again, gas technology was a key driver, as was activity in the new energy sector. The strong numbers were accompanied by a 5% upgrade to the mid-point of full-year guidance.
The market will be watching closely to see if oil price weakness and continuing conflicts in resource-rich regions have put the brakes on ordering activity again. However, gas prices have been far more robust which we think plays to Baker Hughes’ strengths.
With the order book sitting in the region of $33bn, there’s still plenty of work to be getting on with if energy companies in some sectors do pull back on investment plans in the short term.
There’s an exciting growth story emerging at Baker Hughes, whose technologies are well aligned with shifts in the energy mix.
Over time, there’s a significant opportunity to generate recurring revenues from digital products like CarbonEdge for the monitoring of carbon capture projects. But it will be a while before this can be declared a commercial success.
The quality of the business is recognised in a valuation that sits at a premium to the peer group. While we think it’s well deserved, it does mean there’s pressure to keep growth moving in the right direction.
Coca-Cola
Coca-Cola continued its strong run with another sparkling set of results in July.
Second-quarter underlying revenue grew 10% to $12.4bn ignoring currency impacts, with both price and volume movements contributing positively to the uplift.
Top line growth, alongside some efficiency savings, more than offset a rise in marketing spend. This helped underlying operating profits grow at an even faster pace of 18%, reaching $4bn.
We’re pleased with the progress, which gave management confidence to nudge up guidance for the second time this year.
Full-year organic revenue and underlying earnings per share (EPS) are now expected to grow between 9-10% and 13-15%, respectively (up from 8-9% and 11-13%).
A lot of this can be put down to its Herculean marketing effort.
Over the last decade, the group’s spent around $94bn keeping its products front of consumers’ minds. That’s more than double its main rival, PepsiCo. The money’s increasingly being spent more effectively, helping keep Coca-Cola’s sales growing ahead of peers.
Healthy free cash flows support the 2.8% forward dividend yield. And with net debt continuing to move in the right direction, we think there could be more activity on the acquisition front.
This brings risk though as getting the right brand at the right price is a difficult task. And even if Coca-Cola pulls it off, it’ll likely need years of investment to ramp up production and elevate
Despite the year-to-date valuation uplift, we still view it as attractive on a long-term basis. However, it does add more pressure to deliver growth in the near term, so ups and downs can’t be ruled out.
CVS Group
Despite some well-documented challenges, CVS Group managed to grow like-for-like sales by 2.9% in its last financial year, with total revenue coming in at £647.3mn. That said, it was a significant slowdown from the previous year. Underlying cash profit (EBITDA) also held its own rising 4.7% to £127.3mn.
But on a reported basis, profits were negatively impacted by exceptional costs relating to a cyber breach and the ongoing industry investigation by the Competition and Markets Authority (CMA).
The group also recognised a £20mn loss on the disposal of its Dutch and Irish operations.
Management is comfortable with consensus expectations for this year. At the time, that pointed to revenue of £710.2mn and cash profit of £138.4mn, with growth supported by CVS’s expansion into Australia.
The group’s valuation has recovered a little since news of the formal CMA investigation spooked the market earlier in the year. However, it still remains well below its long-term average.
The final outcome of the CMA probe won’t be clear until the end of 2025.
Until then, sentiment is likely to be impacted by the continued uncertainty. We feel this represents an opportunity to invest in a quality business with growth potential, though it’s higher risk.
Greggs
Greggs continues to impress, with recent results showcasing its strengths.
Third quarter like-for-like sales in company-managed shops grew by 5%, and total sales rose by nearly 13% compared to the same period last year, showing the company's resilience despite economic challenges.
Investor sentiment remains positive, bolstered by double-digit growth in underlying pre-tax profit back at the half year mark and a 18.8% hike for the interim dividend, reflecting confidence in Greggs' ongoing growth.
Despite being second only to Costa in UK store numbers, Greggs is pushing ahead with ambitious expansion plans.
The total store estate is growing, currently sitting at over 2,500 locations. Management aims to add a net total of 140–160 new shops this year, targeting over 3,000 UK shops by the end of 2026.
Strong demand is supporting a larger estate and driving increased revenue at each store.
Evening trade, though still a small portion of sales, presents significant growth opportunities through extended hours, enhanced hot food options, and promotion of the loyalty program. Notably, the number of people using the Greggs App has risen substantially, indicating growing customer engagement.
While cost inflation remains a challenge, Greggs has kept prices competitive, maintaining its reputation for value. Product prices have risen less than many peers over the past few years, ensuring the brand's value proposition remains strong.
Greggs is laying solid foundations for future growth while offering an attractive dividend yield for a growth-oriented name. We remain positive about the company, but acknowledge that no returns are guaranteed. Strong recent performance also sets high expectations, increasing the risk of short-term volatility.
Lloyds
We’ve been pleased with Lloyds's performance this year.
Management has done a good job of setting realistic expectations and delivering across key areas. With the macro-environment in the UK also improving, Lloyds’ valuation has returned to levels not seen since 2019.
June’s half-year results were better than markets had expected, largely driven by a resilient performance from borrowers. Default rates are still low, and Lloyds’ strong asset quality remains a strength.
It was also good to see loan book growth over the second quarter, something that’s expected to continue into the second half. We’ll find out if that’s the case later in the month when third-quarter results are released.
There’s also an ongoing impact from consumers shifting to longer-term savings accounts in search of better rates. But the pace of switching has eased, which is good news for Lloyds.
We often discuss structural hedges and still feel they’re an underappreciated source of income over the medium term. This can be thought of as behaving a bit like a bond portfolio, and as the bank rolls from low-yielding contracts written over the past few years onto higher-yielding ones, income is expected to get a significant boost – to the tune of £700mn over 2024.
There’s been no update yet on the FCA’s investigation into the mis-selling of motor finance. Lloyds is more exposed than peers and this is still a key risk to watch.
10 months in, and Lloyds is still one of our preferred names in the sector. But with the valuation having already seen a decent move higher, there’s more pressure to deliver.
