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A brokerage in Kuala Lumpur. Picture used for illustrative purposes. Image Credit: AP

Dubai: If you’re looking to strengthen your portfolio through diversification or add more growth potential to your investments, stocks can be an ideal component in your overall investment strategy.

Given the strong possibility of economic recovery in 2021, it might be alluring to fill up your portfolio with every laggard stock that slumped during the pandemic in 2020. However, 2021 doesn’t promise any less uncertainty than its predecessor, so investors should remain cautious, as always.

The pandemic has driven a worldwide reliance on technology, from e-commerce to teleconferencing, and as a result, the stocks of the top five global Tech giants, under the acronym FAAMG – Facebook, Apple, Amazon, Microsoft, and Google – have returned over 50 per cent money growth in 2020.

This growth is compared with just 6.3 per cent for the other 495 members of the key US S&P 500 benchmark, an indicator that is tracked by movements of other key indices worldwide. Together, they now have a market value of $7.2 trillion (Dh26.5 trillion).

What if you only invested in the Big-5 Tech Stocks in 2020?

Let’s say you were keeping your entire portfolio in an S&P 500 exchange-traded fund (ETF), then that would imply that 23 per cent of your assets would now be parked in those five stocks alone.

US technology companies attracted the highest trading volumes among investors in the UAE and around the world in 2020, analysts at Saxo Bank had noted recently.

While allocating space in your portfolio to stocks both the UAE and international markets is a move experts reiterate many investors should strongly consider, there are also a number of others factors to consider.

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What stocks investors should keep in mind, or look out for?

Stocks that are top gainers often continue to soar and reach new highs when their indicators of underlying fundamentals are strong. However, when a stock keeps making new highs it’s also important to monitor it closely since there might be a retracement in price value.

Here are the top analyst picks for international and UAE stocks you should consider investing this year, based on metrics used to identify true value of the stock, future earnings and potential for the share price to grow in the months to come:

1. Swedish telecom company Ericsson

With the rollout of 5G requiring lots of new equipment, Huawei and ZTE are Chinese-based companies on the forefront of equipment and device production for 5G.

However, both in the US and in other markets factors leading to political uncertainty has hindered these companies’ 5G-related investments, which is why analysts cite two growing competitors, namely Samsung Electronics and Ericsson.

Ericsson was affected by European regulations, labour challenges and tax code issues as well, but investors are impressed with its turnaround despite being hit. This is resulting in revenues (which should be gaining ever further as it is one of the go-to alternatives to Huawei and ZTE) rising by 8 per cent.

The key advantage of a stock like Ericsson is that the company has very little debt, which analysts opine it could be tapped to ramp up 5G product development – prompting a ‘strong buy’ recommendation on the stock.

However, it has a value at only 1.6 times trailing sales (sales over the preceding period) and 4.7 times book value (i.e. true price value of a stock). But its dividend yield (how much a company pays out in dividends each year relative to its stock price) is in the lower end at 0.7 per cent. All of this, analysts add, puts the stock as a turnaround play for 5G as it has a lot of value and opportunity.

2. South Korean electronics firm Samsung Electronics

The stock of Samsung Electronics, one of South Korea’s leading technology companies and one of the globe’s biggest companies for everything from electronic devices to chips, has delivered a return of 332 per cent over the past 10 years.

Furthermore, that streak extended for all of 2019 through to date with a return of 47.4 per cent — outperforming many peers in the US as well as the key global benchmark S&P 500.

Although it has faced some challenge in that prices for memory chips around the globe are lower – which dented the revenue numbers of recent quarters – overall revenues over the past 10 years continued to expand.

Operating margins (profit made by the company on the dollar after deducting costs) are widely viewed by analysts as strong for such a huge company at 12 per cent and in turn, even with all of the ongoing capital investments, the return on equity is good at 7.8 per cent.

Another key attraction for the technology stock is that it has a dividend yield of nearly 2.5 per cent, but the real lure is that despite the stock’s price gains – it is a bargain at only 1.50 times trailing sales and 1.32 times book value.

3. Canadian telecommunications company BCE

BCE or Bell Canada is Canada's largest communications company and is commonly referred to as Canadian version of US telecom giant AT&T.

The firm is set to play a vital role for the rollout and evolution of 5G in Canada, even as its wireless business contributes a smaller overall percentage of revenue than its data and hard-wired connections.

Revenue continues to advance at a dependable rate currently running at 2 per cent over the past year, while operating margin is strong at 23 per cent to help make the return on equity running at 15 per cent.

Moreover, the stock yields a generous 5.8 per cent, which continues to rise, and the stock is reasonably valued at 3.07 times book value and 2.2 times trailing sales.

4. Switzerland-based food and drink conglomerate Nestlé:

Many of the big-name consumer products companies have significantly disappointed shareholders in the past years, but that has changed during the novel coronavirus and the resulting stay-at-home trends.

As households around the planet are demanding more consumer products from snacks to pet foods, one of the trend-beneficiaries is Nestlé, which is a Swiss-based company that offers a variety of products from food to pet goods.

Although revenues continue to rise slower, at a rate of 1 per cent, over the trailing year, that’s comparatively much better than many of its peers.

Moreover, the firm’s stringent cost control measures are evidently working with operating margins running at a whopping 17.3 per cent, which in turn feeds a mammoth return on equity (a measure of profitability in relation to the assets of a business, minus debts) of 28.7 per cent.

While the dividend yield is minor, it is better than the average for the S&P 500 benchmark in the US at 2.4 per cent. Additionally, the shares have delivered a return of 81.7 per cent over the last five years — outpacing the S&P 500 benchmark.

What are the top UAE stocks to watch out for?

In the UAE, the stocks that are currently endorsed by analysts as a ‘definite buy’ are Dubai National Insurance Co and Emirates Refreshment, currently known by its new name Emirates Reem Investment Company. It is also recommended that investors should currently buy shares in Aramex as well.

Here’s why it makes sense to buy these UAE stocks:

Dubai Insurance Co: The first local insurance company to be formed in the UAE, has a per-share cost of Dh4.8 but has grown 15 per cent on average. It has a strong dividend yield of 8.2 per cent and an operating margin of 38.7 per cent, with a moderate P/E ratio of 8.2 per cent.

What is a good P/E Ratio?
It is the company's share price compared to its earnings per share. A high P/E ratio could mean that a company's stock is over-valued, or else that investors are expecting high growth rates in the future, meaning investors are willing to pay a higher share price today. The average P/E historically ranged from 10 to 15.

Emirates Refreshment: The Dubai-based bottled water and soft drink bottling company has risen 15 per cent on average and the stock’s key attraction is that it has risen over 1,000 per cent in the last six months.

Aramex: The courier services company has a dividend yield of 3.7 per cent, while an operating margin of 10.9 per cent. The stock has a P/E ratio of 17.9, which is considerably higher than the industry average.