12 Shares the Market Loves

LONDON -- The City is home to some of the U.K.'s best-paid research professionals, hired to analyze investment opportunities on the stock exchange. After building complex data models and sourcing information from a range of sources, they deliver their verdict.

What are the companies that the most investment analysts are recommending investors buy?

Some FTSE 100 (UKX) companies are analyzed by up to 30 different stockbrokers. Here are the 10 companies that are the most popular with the research community. Remember, just because analysts have recently been saying these shares should be bought, that does not mean that the shares will necessarily rise.

In the following table, a consensus recommendation of 5 would be unanimous "Strong Sells," while a score of 1 would be all "Strong Buys."

Company

Price (Pence)

Broker Consensus

P/E (Forecast)

Yield (Forecast, %)

Market Cap (Millions of Pounds)

BG 1,321 1.7 15.5 1.2 44,948
Shire 1,696 1.8 13.5 0.6 9,537
Polymetal International 1,105 1.8 13.1 1.9 4,228
Rio Tinto (LSE: RIO.L  ) 3,080 1.9 9.3 3.2 43,463
Rexam 445 1.9 12.6 3.4 3,907
Babcock International (LSE: BAB.L  ) 953 1.9 13.8 2.6 3,434
Melrose 234 2.0 14.5 3.2 2,958
Schroders (LSE: SDRC.L  ) 1,220 2.0 9.5 3.8 2,757
Xstrata 959 2.0 12.0 2.6 28,340
WPP (LSE: WPP.L  ) 796 2.0 10.9 3.5 10,045
Aberdeen Asset Management 319 2.1 14.9 3.3 3,672
Prudential 839 2.1 11.9 3.2 21,461

Data from Stockopedia.

Four shares stood out in particular.

1. Babcock International
It's difficult not to admire Babcock International. Despite the recession, the engineering services company has enjoyed huge growth.

In the past five years, earnings per share at the company have increased by 16.9% per annum on average. In that time, the dividend has increased 23% per annum on average.

Growth is forecasted to continue for the next two years. A huge 51.6% EPS increase is expected for 2012, followed by a more modest 5.8% increase in 2013. Dividend growth is expected to moderate but still beat inflation. This puts Babcock on a 2014 price-to-earnings ratio of 12.9 and a yield of 2.9%.

Surprisingly, share-price growth in that time has been more muted. In five years, shares in Babcock are up by around 70%. The shares have been a big success, however, and the shares trade near an all-time high. Babcock shares have tenbagged in the past decade.

2. Schroders
I've long regarded shares in asset-management companies like Schroders as a geared play on the financial markets. I can quickly test this conviction by comparing Schroder's share price with the FTSE 100 (UKX).

In the past five years, shares in Schroders peaked at 1,900 pence in January 2011 and again later at the end of April in the same year. The FTSE 100 was also making highs at this time. However, the FTSE 100 had been at higher levels than its 2011 peak in the first half of 2008.

Schroders shares hit a low of 635 pence in late November 2008. At this time, the FTSE 100 was at 3,780. The index hit its low in March 2009.

I'm happy that I'm right enough for this to be a working basis for analyzing Schroders as an investment opportunity. Analysts forecast that Schroders will deliver significant growth this year and next.

All bets will be off if the markets make a substantial move either way.

3. Rio Tinto
In the past five years, shares in super-miner Rio Tinto are down almost 30%. For a FTSE 100 company, they currently look cheap. Perhaps it is this valuation that has led so many analysts to recommend that the shares be bought.

Shares across the sector have struggled as concerns over the strength of the Chinese economy have increased.

Rio trades at just 6.6 times last year's earnings. For 2012, earnings are expected to fall, putting the shares on a forward P/E of 9.5. Growth is expected to return for 2013, meaning that the P/E falls to 8.4.

Recent directorspeak has been mixed. The company has complained of "volatile markets" while still enjoying some high production figures.

The dividend is expected to continue rising. The forecasted yield for 2013 is expected to hit 3.4%.

4. WPP
WPP has long been a stock market darling. Chief executive Sir Martin Sorrell is a regular interviewee in business media. Sir Martin has been chief executive of WPP since forming the marketing giant in the mid-1980s.

Despite all of WPP's success, the shares have not been a great performer, rising only 30% in the past five years and 44% in the past 10.

The dividend has been a different story. Since WPP started paying in 1999, the payout has increased almost tenfold and has never been cut.

This has proved a difficult year for WPP. Last week, WPP cut its sales forecast for the year. This hit the shares, which are now 10% off their high for the year.

Nevertheless, WPP is still expected to increase earnings and dividends for the next two financial years. This means that the shares trade on a 2013 P/E of 9.8 and an expected yield for 2013 of 4%.

While the analysts may love these shares, contrarian investors might like to look elsewhere. Warren Buffett once suggested that investors should be greedy when other people are fearful and be fearful when other people are greedy. Buffett's contrarian streak has helped make him one of the world's greatest investors, and he has recently been building a stake in a large U.K. business. To find out which share Buffett has been buying and why, take a look at the free Motley Fool report "The One U.K. Share Warren Buffett Loves." The report is completely free and will be delivered to your inbox immediately.

He avoided techs in the dot-com bubble and banks in the credit boom. But just where is dividend expert Neil Woodford investing today? All is revealed in this free Motley Fool report -- "8 Shares Held by Britain's Super Investor."

Further investment opportunities:

David O'Hara owns no shares in any of the above companies. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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