Seven stocks to cash in on the new thrift

Thrifty buying means finding lower prices, cheaper alternatives, or patching up the present version until you’ve saved enough for a replacement.

When it comes to keeping the car going for another year, or switching to pedal power, one share tops the list: Halfords Group (LSE: HFD). Halfords has a market cap of just £680m, but it’s Britain’s leading retailer in car maintenance, enhancement and leisure. The latter includes bicycles, cycle accessories, child car seats and outdoor leisure kit. Earnings per share rose 8.5% for the year to 3 April 2009. Like-for-like sales fell by 3.3% because of falling satnav prices. But the dividend was raised by 5.3%, reflecting management’s “confidence in… near and long-term prospects”.

Halfords is “one of the few general retailers we expect to grow earnings in 2010”, says John Stevenson of KBC Peel Hunt. The price/earnings ratio (p/e) for the 12 months to April 2010 is ten and is forecast to drop to 9.6 for 2011, while the forward yield is almost 5.5%. With bicycle use growing and the firm’s international expansion and cost-cutting programmes on track, Halfords is worth buying.

Another area set to benefit is gardening, particularly as unemployment rises and “more people stay home and tend to their greenery”, says Reshma Kapadia of Smart Money. In the US, lawn and garden product maker Scotts Miracle-Gro (NYSE: SMG) could be the stock to own. It’s selling on 15 times net profits for the year to September 2009.

But earnings are expected to climb 15% both this year and next, and should get a boost as Scotts gains business from the recent demise of a rival company, says Sam Yake at BGB Securities. That should cut the forward p/e to around 13 times. And with sales up 17% in the year to end-May, Yake reckons company guidance is still too conservative – ie, profits could prove higher than forecast. He has a target price of $47, almost 30% above the current price.

The UK’s garden centres could also flourish. Unfortunately for investors, Tesco (LSE: TSCO) has now taken over the once-quoted Dobbies. But that’s another good reason for buying into Britain’s biggest retailer, whose tills take one in every three pounds spent in this country’s supermarkets.

Despite the grocer’s ongoing price cuts – aimed at enticing thrifty shoppers – last month’s trading update showed that like-for-like turnover for the quarter to end-May was up 4.3%. With international sales up 20%, management remains confident about the future. Compared with both its historic valuation and price, Tesco is cheap.

The shares are more than 25% off their peak of 18 months ago. And on a p/e of just 12 this year, falling to 11 for 2010, the stock sells on less than half its valuation of eight years ago. It yields 3.5%.

A much smaller company, but a potentially very profitable play on the return of thrift, is Park Group (LSE: PKG).

It’s Britain’s leading seller of corporate gift vouchers and gets two-thirds of its revenues from its Christmas savings club – the classic thrift scheme. The sector hasn’t had an easy ride in recent years – rival Farepak went bust amid much controversy in 2007.

Park has re-established confidence in the savings club concept by ring-fencing customer prepayments from company funds, but the Farepak furore still did plenty of damage.

Park’s shares still sell on just 8.5 times current year net profits, says Mark Durling of Edison Investment Research, and offer a tasty dividend yield of 6.8%. For next year, the p/e ratio is forecast to drop to below seven on a forward yield of over 7%, so you’re hardly overpaying for a slice of the action here.

As consumers start to worry more about money, they take more time to look for the best deals. This is where price comparison sites can help – allowing users to compare prices for everything from mortgages to gas providers. However, sector leader (LSE: MONY) has had a torrid time since floating two years ago, with the shares plunging by 70%.

The collapse in mortgage and other lending has hit broking revenues, while growing competition in the motor insurance market has squeezed margins. But while the latter remains very competitive, the mortgage market has stabilised. And on its current market cap of £250m, Moneysupermarket now looks cheap, on a current p/e of 13 and yielding 6.2%.

For 2010, City analysts expect these numbers to look even better as cost cutting kicks in, with the p/e ratio set to drop to 11.3 and the forward yield set to rise to 6.4%. “With £73.5m of cash and positive operating cash flows, Moneysupermarket can afford to win market share at the expense of more weakly capitalised peers”, says Jamie Briggs at Noble Research. “Our model suggests a valuation 37% above the current price”.

Businesses need to cut back too. Symantec Corporation (NYSE: SYMC) sells security software and data storage systems. Thrifty firms “are turning to new options like cloud computing (computer services over the web) to reduce software expenses”, says Kapadia. “Companies like Symantec should benefit.”

The stock has been out of favour with investors, but that could be about to change. On a 2009/2010 p/e of just 10.2, falling to 9.7 next year, Symantec looks cheap. “We believe Symantec offers one of the most compelling values on software”, says Gregg Moskowitz of Auriga, who has a price target of $21.

Finally, there’s Mitie (LSE: MTO). This £700m British ‘facilities’ company helps both private- and public-sector firms cut costs by outsourcing management of everything from property to catering, cleaning, security and pest control – you get the picture.

“It has defensive yet growing earnings, an attractive combination”, says Fiona Orford-Williams of Edison Investment Research. A “strong order book, good cash flow and robust financial position” mean the board is confident on the company’s future, according to last week’s statement.

The stock is on a p/e of 12 for this year, dropping to 11 for next, while the yield is 3.5%.

  • This article was originally published in MoneyWeek magazine issue number 444, and was available exclusively to magazine subscribers. To ensure you don’t miss a thing, and get instant access to all our premium content
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