MoneyWeek’s investment writers’ tips for 2025
US small caps: Stephen Connolly
Recommended by: Stephen Connolly
In 2023, US smaller companies delivered only two-thirds of the 27% return their larger counterparts managed, says Stephen Connolly. This year, up until the US election, their relative performance was even worse, at just over half. But since then, in response to Trump’s victory and his “America First” agenda, small caps have rebounded rapidly.
Trump might be light on detail, but his messaging points to a warm environment for America’s smaller, domestically exposed businesses and entrepreneurs – bringing back manufacturing to the US, imposing high tariffs, boosting enterprise with tax breaks, and binning burdensome regulation and red tape. All this suggests that US small caps could well outperform in 2025. Switching about 5% of your portfolio’s equity exposure to them could, at a stroke, reduce your overall risk thanks to increased diversification while giving you more growth.
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The Russell 2000 is the 40-year-old index that tracks the ups and downs of the smallest 2,000 US companies – 7% by value of the market. The average size of these companies is just $4 billion, versus $950 billion for the largest. And while a third of the big stocks’ index is weighted to technology, including giants near all-time highs such as Apple, Nvidia, Amazon and Tesla, the small-cap arena is more balanced. Tech exposure drops to just 10%, for example, in favour of less racy sectors like industrials and materials that potentially offer more value.
The simplest way to get exposure is via State Street’s SPDR Russell 2000 US Small Cap (LSE: R2SC), a UK-listed exchange-traded fund. The total annual charges are only 0.3% and you can put it in an Isa or a Sipp, too.
Europe: Frédéric Guirinec
Recommended by: Frédéric Guirinec
My 2024 tips – Polish miner KGHM and the iShares MSCI Emerging Markets ETF – delivered returns slightly above 10%, says Frédéric Guirinec. But their performance pales against the blistering gains from crypto and US stocks. This year has been difficult for western Europe. France is flirting with a financial crisis, German industrial production is in free fall and Britain is turning socialist. Despite this gloom, we can still find some undervalued companies or businesses with strong prospects.
France’s CAC 40 index returned a 0% yield this year and French companies are overlooked by international investors. Take private-equity firm Wendel (Paris: MF): it trades at a 50% discount to net asset value (NAV). You get the illiquid assets almost for free once you deduct the value of the listed assets. Could this be a free lunch? Meanwhile, OSE Immunotherapeutics (Paris: OSE) has registered strong growth: it produces Tedopi for lung cancer, while the development of lusvertikimab for the treatment of ulcerative colitis is on track. Central Europe is also a solid bet. AmRest (Warsaw: EAT) operates more than 1,600 restaurants under brands including Starbucks, KFC, Pizza Hut and Burger King. Central Europe makes up 60% of its revenues, it generates strong cash flow and trades at discount to peers, so it is an attractive long-term hold. Hungarian telecoms firm 4iG (Budapest: 4iG) is developing fast with government support.
Games Workshop: Cris Sholto Heaton
Recommended by: Cris Sholto Heaton
My pick for 2025 has risen strongly in recent months, says Cris Sholto Heaton, but it can go further, not least because it is a rare global growth story in a market that is desperate for them. Games Workshop (LSE: GAW) will join the FTSE 100 index this month. The company makes tabletop battle games in two settings – science fiction (Warhammer 40,000) and swords and sorcery (Warhammer Fantasy Battle) – with a devoted set of fans around the world.
This has been an excellent business with high margins, good cash flow and a solid balance sheet, but it would have to sell far more plastic figurines to justify its forecast price/earnings ratio of 29 for 2025. The long-term upside lies in how well Games Workshop can extend its intellectual property (IP) through other channels such as film and television adaptations. It has just finalised a deal for Warhammer 40,000 with Amazon Studios, although there is no detail on how soon the first productions will be completed. What is underappreciated is how shrewdly Games Workshop has been evolving its IP. As far as I can see, Warhammer 40,000 has gone through three distinct phases.
The first, starting in the 1980s, had a strongly satirical tone. This gave way to a nihilistic style, dubbed “grimdark”. Both had limited broad appeal. More recently, Games Workshop seems to have been bringing in new storylines to leaven the mix, adding characters that are just a little more heroic and offer a touch more optimism. That has far greater potential to reach a wide audience, which can both increase licensing income (just 6% of revenues currently) and maybe even convert a (small) proportion of viewers into buyers of the games.
Canada: Max King
Recommended by: Max King
Canada’s stock market is 80% of the size of the UK yet widely ignored, says Max King. Most “North American” funds are synonymous with the US, yet Canada is home to many successful and interesting companies. It has just one trust, the £850 million Canadian General Investments (LSE: CGI). Its shares trade at a discount to net asset value (NAV) of more than 40%, yet they have compounded by 13.9% a year over the past five years and the NAV by 15.9% a year. One-year returns are 25.3% and 33.5% respectively, yet the Canadian market trades on only 15.6 times forward earnings, a 30% discount to the US, and yields 2.7%, twice as much.
Canadian General Investments (CGI) has to pay capital gains tax (CGT) on realised profits, but if the gains are distributed, this tax franks the dividend, leaving shareholders with no income tax to pay. This encourages CGI to run its profits rather than see the trust whittled away by distributions. As a result, CGI’s largest holding is Nvidia (7.6% of the portfolio), bought in 2016 at just $1.35 a share, one-hundredth of its current level. Since then, profits of $150 million have been realised.
CGI can invest 25% of its portfolio in the US, so Apple and Mastercard are also in the top ten holdings. Other large ones include the Canadian e-commerce company Shopify, and pan-North American transport firms TFI and Canadian Pacific Railway. Materials and energy make up 25% of the portfolio (5% less than the overall market) and these include the gold royalty group Franco-Nevada and uranium miners Cameco and NexGen. Financials constitute 32% of the index but just 13% of the portfolio, while technology exposure is 24% against 8% for the index. There is every prospect that the Canadian market will continue to perform, that CGI will continue its long-term outperformance and that the discount will narrow. The dividend yield is 2.5% and the payout has risen every year for a decade.
Defence: Rupert Hargreaves
Recommended by: Rupert Hargreaves
Aerospace and defence equities outperformed in 2024, and this trend looks set to continue in 2025, says Rupert Hargreaves. European aerospace and defence equities, in particular, appear well placed to benefit from a step change in government spending over the coming years. Countries in the EU increased defence spending by 10% to a record €279 billion last year, the highest level in more than two decades and the ninth year of consecutive growth.
According to the European Defence Agency, that number is set to hit €326 billion in 2024, extending the explosive run of growth for another year. On top of this, the region is also racing to set up a €500 billion joint defence fund that can be used to support collective defence projects, such as common air defences. With money flooding into the sector, there’s further growth on the cards for Europe’s defence giants.
When it comes to defence spending, countries often prioritise their own home-grown companies, or in Europe’s case, those domiciled in Europe. Moreover, spending plans tend to run over many years and, in some cases, decades. That means companies have a great deal of visibility over future revenue streams.
The MSCI Europe Aerospace and Defense index returned around 30% in 2024 as investors factored in this future growth. Still, even after this jump, the index’s forward price/earnings (p/e) ratio stands at only 21.8, compared with 25.6 for the global average (the MSCI World Aerospace and Defense index). This valuation also overlooks future earnings growth potential as spending ramps up over the next few years.
There are several ways to play the trend. The continent’s biggest defence contractors, Rheinmetall (Frankfurt: RHM), Safran (Paris: SAF), Airbus (Paris: AIR), Rolls-Royce (LSE: RR) and BAE Systems (LSE: BAE) all offer something different in terms of subsector exposure (such as tanks in the case of Rheinmetall, jet engines for Rolls-Royce and ships for BAE) and are likely to benefit from the overall rise in spending. Smaller players, such as Cohort (LSE: CHRT) and Babcock (LSE: BAB), might offer more scope for growth, although their smaller scale means they could struggle to win bigger contracts. Finally, there are ETFs tracking the sector, such as the HANetf Future of Defence Ucits ETF (LSE: NATO) and the VanEck Defense Ucits ETF (LSE: DFNS).
Copper: James McKeigue
Recommended by: James McKeigue
Since 6 November, pundits have been guessing who will be hit hardest by Donald Trump’s second stint as US president, says James McKeigue. One early set of victims is copper investors. The red metal has fallen 6.6% since the election. Copper is priced in US dollars, and with the greenback surging the relative value of copper has dropped. Any trade war, and the resultant hit to global growth, would dampen demand for copper – a metal with such widespread industrial use that demand closely tracks GDP growth. Meanwhile, on the supply side, copper had a relatively good year. Rising mine production in 2024 – especially from the Democratic Republic of Congo, which is set to overtake Peru as the world’s second-largest copper producer – will lead to a small surplus of copper this year. The sense of ample supply is even evident on the main metal exchanges, where copper inventories have almost doubled in 2024.
All these short-term factors have pushed the copper price down 18% from its record high of $11,104.50 per tonne in May. But the long-term outlook remains bullish. The world will still need lots of copper to electrify economies. The percentage of total annual copper consumption going into energy transition applications will reach 20% in 2034, from 10% today.
That will drive up overall copper demand by 2.6% a year over the next decade, while supply grows at an annual rate of 2.1%. By 2034, today’s marginal surplus of a few thousand tonnes will turn into a deficit of almost two million tonnes. A simple way to invest, without taking on individual company risk, is through an ETF. One option is the WisdomTree Copper ETF (LSE: COPA). Or invest in a basket of miners through the Global X Copper Miners ETF (LSE: COPG).
(James is the editor of Base Metals, Europe, at Fastmarkets).
Burford Capital: Bruce Packard
Recommended by: Bruce Packard
In 2025 we should see the outcome of Burford Capital’s (LSE: BUR) litigation-funded court case against the Argentinian government, says Bruce Packard. The case dates back to the expropriation (theft) of YPF, the energy company, from investors. In September 2023 Judge Preska in New York awarded $16.1 billion in damages to the plaintiffs, of which Burford’s share could be $6.3 billion (£5 billion or £23 per share). That compares with a current market value of $3 billion (£2.4 billion or 1,060p per share) and a value of $1.5 billion (550p per share) carried on Burford’s balance sheet.
After BUR’s win in September, Argentina filed an appeal; a decision is likely in 2025. BUR expects a negotiated result at under 100% of the judgment value, but the stock price implies either that the case will be lost on appeal or that Burford won’t be able to enforce the judgement of a US court on a sovereign state.
The firm also enjoyed a record quarter in 2024, generating cash receipts of $310 million. Realisations from the core portfolio of disputes doubled year on year to $165 million. Burford is a share that investors struggle hard to value: the price peaked at £20 per share in 2018 before slumping when Muddy Waters, the short seller, questioned the group’s fair value accounting write-ups for court cases such as the YPF dispute. Even if BUR doesn’t receive the full £23 per share from Argentina, a judgment in its favour and enforcement should validate its litigation-finance business model.
Cordiant Digital Infrastructure: David C. Stevenson
Recommended by: David C. Stevenson
Long-term investors should keep an eye on Cordiant Digital Infrastructure (LSE: CORD). Despite a top record, it’s still trading at a discount to NAV of more than 30%, which is unwarranted, says David C. Stevenson. Cordiant is a private equity-style investment vehicle that invests in digital broadcasting infrastructure (mainly in eastern Europe), data centres, fibre networks and mobile phone towers.
It’s a compounding capital-growth story with assets that are experiencing high demand for their services – all data-based, and some even AI-oriented (data centres in particular). The shares yield a shade under 5%. The group’s challenge is producing enough cash to pay its debt first (it has a big book of manageable debt), its dividend to shareholders and the need for spending on its data centres or broadcast infrastructure. It does this comfortably because it has a cautious, experienced management team. Its chairman has been buying shares in the fund and is now one of the largest shareholders. Cordiant has also managed to refinance slugs of debt comfortably and has been steadily growing its NAV along with its dividend (which is 1.8 times covered).
The various funds within the overall investment vehicle, worth £650 million, produce £318 million of revenue and Ebitda of £150 million. Finance costs run at about £40 million and capital expenditure has reached £80 million. NAV has grown by 10% per annum since launch, and business has been booming for most of its units. Crucially, the businesses within the portfolio were bought at an enterprise value to Ebitda ratio (EV/Ebitda) of ten, while the Ebitda margin is 47%. If these businesses were shipped into a US-based digital infrastructure operating company and then listed on US exchanges, they’d probably command multiples two to three times these numbers. (I own a fair bit of Cordiant.)
Boeing: David J. Stevenson
Recommended by: David J. Stevenson
My 2024 selection, Mandalay Resources, has doubled since I tipped it, but even so I was tempted to tip it again as the shares remain dirt cheap, says David J. Stevenson. However, I’m always looking for out-of-favour, top-notch companies with great recovery potential. And in US aircraft maker Boeing (NYSE: BA), I think I’ve found one. It’s one of the “big two” in the global aircraft industry, the other being Europe’s Airbus. Yet Boeing’s woes have mushroomed in recent years. The 737 MAX disasters, operational inefficiencies, high-profile scandals, production delays and mishaps, strikes… they’ve all damaged Boeing’s brand and caused major financial losses, as well as significant debt and cash flow problems.
Cue new CEO Kelly Ortberg, who started in August 2024. He’s looking at every part of the business and every process with fresh eyes, asking everyone, “Does this help us build aeroplanes?” The stock price has fallen some 64% from its 2019 peak. While current financials are grim, the ultimate downside is covered by the US government, which would never let Boeing fail. Meanwhile, annual sales are $73 billion and the order book is worth more than $500bn. Seven years ago, Boeing’s annual earnings per share (EPS) were $18. If Ortberg can restore the firm’s profitability to anywhere near this level, the shares would soar.
Furthermore, a possible corporate break-up would release hidden value for shareholders. “Focusing on innovation, sustainability and efficiency, Boeing’s commercial division could commit entirely to satisfying rising demand in a fast-changing industry,” says Forbes. The Defense & Space division “would have… independence to focus on government contracts and long-term expansion. Global Services might flourish by helping [Defence & Space] and grabbing a bigger portion of the aerospace services market”. Break-up specialist Edge Consulting sees the stock price doubling from current levels in the event of a Boeing split. Even without one, I believe the Ortberg-driven refocus makes the shares a recovery buy.
Warpaint London: Mike Tubbs
Recommended by: Mike Tubbs
Last year I tipped Elixirr International, the digital, data and AI strategy consultancy, at 472p, because of its growth prospects, says Mike Tubbs. The 2024 results to 30 June showed pre-tax profits up 22%, with strong trading momentum in the early months of the second half of 2024. The recent share price is 765p, giving a price rise over the year of 62.1% or 8.2 times the 7.6% rise of the FTSE 100 over that period.
This year I am recommending Warpaint London (Aim: W7L), a company with a market value of £408 million selling high-quality, affordable, branded cosmetics marketed globally. It is growing strongly, with revenue up 79% from 2021 to £89.6 million in 2023 and operating profit up 385% to £18.5 million over those two years. Warpaint was founded in 1992 by the current CEO and floated on Aim in 2016. The firm’s leading brands are W7 and Technic, with brands such as Man’Stuff, Body Collection and Chit Chat targeting specific demographic groups. The company is acquiring Brand Architekts, which has five primary cosmetic/skincare brands, and Warpaint’s latest brand ambassador is TikTok star Vickaboo.
Warpaint is sold in Tesco, Boots and Superdrug and has a growing international presence. It started selling online in 2020, both on Amazon and via its own website. It also makes major high-street retailers’ own-brand cosmetics. Results to 30 June 2024, released in September, showed revenue up 25% to £45.8 million, pre-tax profit up 75% to £11 million and net cash of £5.5 million. The forward p/e is 20 with a forward dividend yield 1.8%. The dividend has increased every year since 2017.
DCC: James Ward
Recommended by: James Ward
DCC (LSE: DCC), an investor in energy, healthcare and technology, is a very cheap stock and a much higher quality company than the market seems to imply, says James Ward. And there are good reasons to believe it won’t stay cheap for long. The stock is currently cheap because, after 25 years of high and steady growth up until 2018, during which it delivered 6,500% for investors, the company underwent a period of lower growth. This happened largely because Covid put a pause on the buy-and-build strategy, which temporarily lowered the growth rate slightly. The shares are at a valuation of roughly half of what it has traded at for most of its history.
This in itself is not enough to state that DCC is set to thrive. However, firstly in 2022, the management said the company would more than double profits before the end of the decade. Secondly, after updating the market two years later to say that it was ahead of this plan, with no reaction in the share price, management has taken action to address the severe undervaluation.
In November, DCC said that it was looking to sell off a firm comprising 10% of the profits, and has another 15% of the company under review. The intention is to sell the businesses – most probably at prices much higher than suggested by the share price – and return the cash to shareholders either via a special dividend or a share buyback. Next year we should see a lot of value unlocked by management, and that should lead to a strong year for the share price.
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