What Should Neil Woodford Do With Allied Minds plc, Drax Group Plc & Rolls-Royce Holding plc Right Now?

Allied Minds plc (LON:ALM) is a stronger bet than Drax Group Plc (LON:DRX) and Rolls-Royce Holding plc (LON:RR) at this level, argues this Fool.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

In a recent update on his fund’s performance, Neil Woodford showed where he has made and lost money in the 12 months to the end of June. 

Allied Minds (LSE: ALM) is one of the best performers in his portfolio, but Rolls-Royce (LSE: RR) and Drax (LSE: DRX) were a drag. 

What’s next for these three companies is less obvious than it may seem at first sight. 

Should you invest £1,000 in Franklin Templeton Icav - Franklin Ftse India Ucits Etf right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Franklin Templeton Icav - Franklin Ftse India Ucits Etf made the list?

See the 6 stocks

Why Allied Minds? 

Allied Minds had an average weight of 2.95% in Woodford’s portfolio — a percentage that is almost in the middle of the highest and the lowest exposure to any stock in his fund. It signals that if you invest in it, you’d do well to be careful with regard to the amount of stock you end up owning. 

Its performance contribution, at 3.21%, tops the ranking by some distance, which reflects a higher level of risk compared to that of several other holdings in Woodford’s portfolio. 

One obvious question now is whether the shares of Allied Minds have lost their sparkle?

Consider that its equity valuation is up 114% in the last year of trade, but its shares now change hands around their one-year median of 473p, for an implied forward valuation of 123 times based on the group’s market cap of £1bn divided by forward revenues of £8.3m — trailing revenues stood just below £8m. 

You’d expect a much higher growth rate for revenues or earnings or both to bet on its stock. 

After all, the biggest highlight of 2014 was its IPO, which was priced at 190p, for an implied market value of about £400m. It raised proceeds of $155m. Based on its funding needs, Allied Minds should be safe for a couple of years at least, in my view. 

No other key financial metric is available, though, and that’s because the company is at an early stage of maturity. A truly attractive feature is the sector where Allied Minds operates, given that it focuses on the commercialisation of scientific discoveries from universities and federal government institutions in the US.

While I’m really tempted to add its stock to my portfolio at this price, I need more evidence that the business can generate earnings and positive cash flows before committing to it for the long term. 

Rolls & Drax: What Do They Have In Common? 

The shares of both companies have fallen off a cliff in recent weeks, yet I think that Rolls-Royce offers more value than Drax at present time. 

Regulatory risk is a significant hurdle for Drax because the UK government is amending its green policy, withdrawing subsidies to the energy sector.

In Woodford’s portfolio, Drax had an average weight of 1.55% and recorded a performance contribution of -0.98% — it’s the worst performer ahead of GlaxoSmithKline (-0.91%), the second-largest holding in his portfolio, with an average weight of 6.49%. 

Drax’s valuation has not recoverd since its 30% drop on 8 July, when the group announced that the government had decided to “remove the Climate Change Levy (CCL) exemption for renewable electricity generated after 1 August 2015″, which prompted lower guidance for cash flows and earnings. 

The power producer has begun a strategic review of its operations, gauging its “long-term options” — in these situations, a takeover becomes the most likely outcome.

If you are tempted to bet on that, however, consider that its shares trade on forward earnings multiples north of 30x, and that Drax would cost up to £1.5bn or more, which isn’t exactly small change in this market, although it could draw the attention of infrastructure funds. 

In fairness, I’d rather bet on Rolls-Royce, which is not a bargain but whose shares trade on lower forward net earnings multiples in the mid-teens.

Rolls Rallies

With an average weight of 2.96% and a performance contribution of -0.57%, Rolls has been a rather disappointing investment for Woodford, but the tide may be turning.

Only a few weeks after a profit warning pushed down its stock close to its lowest level for almost four years, Rolls has rallied (+16% since 27 July) on the back of several rumours according to which activist investors could have a strategy to turn around the ailing engine maker. 

Rolls-Royce Holdings PLC on Monday said its top leaders met with ValueAct Capital Management after the activist investor raised its stake to more than 5% in the British aircraft-engine maker,” Dow Jones  reported on Monday.

That’s all we know, and it’s encouraging — but there are plenty of risks that could still sink the valuation of Rolls.

Pound coins for sale — 31 pence?

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has recommended shares in GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Down 25% since January, this resilient dividend stock’s catching my eye

Maintaining the UK’s rail, water, and energy infrastructure isn’t the most exciting business. But it has made this a solid…

Read more »

Investing Articles

Prediction: Unilever to outperform the FTSE 100 over the next 12 months

The FTSE 100 has made a strong start to 2025, but Stephen Wright thinks a popular dividend stock could be…

Read more »

Investing Articles

I just bought this legendary S&P 500 tech stock for my ISA, 27% off its highs

This S&P 500 stock has tanked over the last month and Edward Sheldon has snapped it up for his portfolio…

Read more »

Young black man looking at phone while on the London Overground
Investing Articles

2 beaten-down stocks to consider for an ISA after the massive market sell-off!

The stock market has had a sudden meltdown! Yet our writer thinks these two growth stocks look attractive candidates for…

Read more »

British Pennies on a Pound Note
Investing Articles

I asked ChatGPT what the best UK penny stock was. This is what it said…

Can AI find winning penny stock investments? Zaven Boyrazian puts ChatGPT to the test and discovers a potentially interesting opportunity.

Read more »

Investing Articles

These FTSE 100 stocks could be the winners from Trump’s tariffs!

President Trump’s unpopular tariffs caused mayhem on the world’s stock markets this week. But some FTSE 100 stocks bucked this…

Read more »

Investing Articles

Are these 3 sold-off UK shares secretly screaming buys?

Despite the FTSE 100 rising, there are still plenty of struggling UK shares. But are these three sold-off stocks potential…

Read more »

Investing Articles

Is the US stock market set to crash in April?

Panic about a looming stock market crash is spreading, but what could be the tipping point? And what can investors…

Read more »